My previous article, Dividend Investing In a Recessionary Environment, addressed the benefits of dividends investing. This article will provide more details about the role ETFs should play in your dividend investment strategy.
The advantages of working with ETFs is that their stock holdings cover a wide range of dividend stocks, giving the investor an opportunity of owning parts of more companies, and also reducing the risk of damage if one or two stocks fail to perform.
On the other side of the same coin, dividend ETFs have disadvantages. The two ETFs described in my last article, as well as many others, do not allow the investor to avoid dangerous stocks, such as banking and insurance stocks. One cannot pick and choose the stocks you may want to avoid or concentrate on. When you buy an ETF all the stocks assembled into that fund go with the territory.
My suggestion for the investor, then, is to build a dividend investment program that includes ETFs and equity stocks. You might buy the best dividend ETFs, such as the iShares Dow Jones Select Dividend Index ETF (Ticker: DVY) and the PowerShares High Yield Dividend Achievers ETF (Ticker: PEY) because of their coverage and diversity, and add stocks that meet the criteria of great investments or, in addition to that, have reinvestment programs.
Value Line investment services evaluates over 1700 stocks for top performers, including those dispersing dividends, and in some cases, sporting automatic reinvestment programs. A select number of stocks from their winning portfolio are shown below. These stocks are those with high safety, top ratings, high financial strength, and low risk (Beta index). They are for the conservative investor. I’ve selected out from the Value Line portfolio those that have dividend yields of 3.0% or higher, and in some cases come from companies that have automatic reinvestment programs.
Value Line picks for income and price appreciation:
|
Stock
|
Ticker
|
Price - $
|
Yield - %
|
Industry
|
Reinvest-
ment Plan
|
|
AT&T
|
T
|
39.60
|
4.20
|
Telecom
|
Yes
|
|
Allete
|
ALE
|
39.55
|
4.50
|
Utilities
|
n/a
|
|
Donnelly
& Sons
|
RRD
|
31.60
|
3.40
|
Publishing
|
n/a
|
|
Du Pont
|
DD
|
47.75
|
3.50
|
Chemical
|
n/a
|
|
General
Electric
|
GE
|
38.26
|
3.40
|
Electrical
|
Yes
|
|
Heinz
|
HNZ
|
47.75
|
3.20
|
Food
|
n/a
|
|
Intl. Paper
|
IP
|
28.20
|
3.70
|
Paper
|
n/a
|
|
Paychecks.
|
PAYX
|
35.57
|
3.50
|
Software
|
Yes
|
|
Sysco Corp.
|
SYY
|
29.90
|
3.00
|
Food
|
Yes
| Data as of
4-1-08
I’ve been somewhat critical of using ETFs for dividend investing. For the most part the dividend yields are low, their assets are at the bottom end of the continuum, their history of dividend distributions is short, and finally, they don’t allow for automatic reinvesting without brokerage commissions.
There are exceptions to some criticisms, as with iShares Dow Jones Select Dividend Index ETF (Ticker: DVY) and the PowerShares High Yield Dividend Achievers ETF (Ticker: PEY), and certainly many ETFs have the foundation for future accolades.
WisdomTree has rolled out several global ETFs based strictly on dividend performance. Among this large group of funds I like WisdomTree Pacific ex-Japan High Yield (Ticker: DNH). It has a YTD (year-to-date) total return of around 19.71 percent and a yield of 5.26 percent.
WisdomTree’s DNH possible advantage over DVY and PEY is that it is more globally oriented. My point here, however, is that if you look carefully at the holdings of the best ETFs you can see how each ETF is constructed. That allows you to understand exactly which stocks and industrial sectors are represented and how ETFs are similar or different.
You can use this information to select the ETFs with the strongest stocks, avoid sectors that are troubled in the market, and build ETF portfolios that are more likely to be productive. You can, for example, decide that iShares DVY is not for you because it has four financial stocks among the top ten.
I still want to encourage you to consider other benefits of microanalysis of ETF holdings. The bigger benefit is that once you know the stock holdings you can, as we might say, “deconstruct” the ETFs and pull together a unique set of dividend stocks that better suits your requirements for a dividend portfolio.
For my next article I will analyze the holdings of the top 12 domestic ETFs. This article will reveal a number of stocks with just unbelievable dividend yields. But high dividend yields often come at a price. Find out more in the next article.
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