5 Low-Risk Dividend Funds — and 3 Aggressive High-Yield ETFs

by Jeff Reeves | August 14, 2012 6:45 am

5 Low-Risk Dividend Funds — and 3 Aggressive High-Yield ETFs

iStock 000003319159XSmall1 e1285092662702 5 Low Risk Dividend Funds    and 3 Aggressive High Yield ETFsDividend investors have no shortage of exchange-traded funds thrown their way these days. But beware the management firms that are launching high-yield products in pursuit of your investing dollars with no clear mission to preserve your capital or ensure those high-yield dividends continue.

Consider the recent launch of a so-called “double dividend” fund[1] that is simply trying to capitalize on the hunger for dividends as a cautionary tale. And generally speaking, all income-oriented investors should beware of chasing yield[2] or making risky sector bets that could burn them if the market turns.

Considering the low Treasury yields right now and the fear of a bond bubble[3], it’s natural to want to stock up on dividend-paying equities. And if you’re an ETF investor, you should consider starting with these five low-risk funds — or three spicier alternatives if you can stomach the risk:

Low-Risk Dividend Fund #1: Vanguard Dividend Appreciation ETF 

Vanguard 5 Low Risk Dividend Funds    and 3 Aggressive High Yield ETFsExpense ratio: 0.13%
1-Year Return:
16% vs. 19% for the S&P 500
Dividend Yield:
2.3%
Net Assets:
$13 billion
Top Holdings:
Wal-Mart (NYSE:WMT[4]), Coca-Cola (NYSE:KO[5]), PepsiCo (NYSE:PEP[6])

Roughly 25% of the Vanguard Dividend Appreciation ETF (NYSE:VIG[7]) is allocated in consumer staples, so don’t expect a lot of jump to shares. That could be a good thing, however, for dividend investors concerned with capital preservation as much as getting paid. The yield is a bit lower at 2.3%, but the rock-bottom expense ratio ensures you’re not paying too much to the fund manager here. The low cost comes from a hard peg to the Dividend Achievers Select Index instead of active management.

For more info, visit this ETF’s page on Vanguard’s website[8].

Low-Risk Dividend Fund #2: iShares Dow Jones Select Dividend Index Fund

ishares 5 Low Risk Dividend Funds    and 3 Aggressive High Yield ETFsExpense ratio: 0.4%
1-Year Return:
19%
Dividend Yield:
3.6%
Net Assets:
$11 billion
Top Holdings:
Lorillard (NYSE:LO[9]), Lockheed Martin (NYSE:LMT[10]), Chevron (NYSE:CVX[11])

The iShares Dow Jones Select Dividend Index Fund (NYSE:DVY[12]) provides a bigger headline yield, thanks in part to being overweight in the utilities sector with roughly a third of its portfolio in this segment of the market. The bigger yield does come at a bit larger expense ratio, however, even if this iShares fund is pegged to the Dow Jones U.S. Select Dividend Index.

For more info, visit this ETF’s page on the iShares website[13].

Low-Risk Dividend Fund #3: SPDR S&P Dividend ETF

StateStreetSPDR185 5 Low Risk Dividend Funds    and 3 Aggressive High Yield ETFsExpense ratio: 0.35%
1-Year Return:
16%
Dividend Yield:
3.1%
Net Assets:
$9 billion
Top Holdings:
Avon (NYSE:AVP[14]), Pitney Bowes (NYSE:PBI[15]), AT&T (NYSE:T[16])

The SPDR S&P Dividend ETF (NYSE:SDY[17]) also provides a bigger headline yield than the low-fee Vanguard option, but treads the middle ground between VIG and the iShares fund with a roughly 20% allocation in consumer staples and 15% in utilities. The performance, however, lags behind on a share-price basis. This fund is tied to the S&P High Yield Dividend Aristocrats index, a list of stocks that have 25 straight years of consecutive dividend increases and thus a great record of stability in payouts.

For more info, visit this ETF’s page on the SPDRs website[18].

Low-Risk Dividend Fund #4: WisdomTree Large Cap Dividend Fund

WisdomTree185 5 Low Risk Dividend Funds    and 3 Aggressive High Yield ETFsExpense ratio: 0.28%
1-Year Return: 21%
Dividend Yield: 2.9%
Net Assets: $1.2 billion
Top Holdings: AT&T (NYSE:T[16]), Exxon Mobil (NYSE:XOM[19]), General Electric (NYSE:GE[20])

The WisdomTree Large Cap Dividend Fund (NYSE:DLN[21]) is an indexed fund, not an actively managed fund, and that gives it a low expense ratio that is second only to Vanguard on this list. However, it uses WisdomTree’s own index, and that seems to make a difference in both performance and yield. About 17% of the fund is in consumer staples, but the next heaviest sector is health care — a recession-proof industry[22] that has helped juice returns.

For more info, visit this ETF’s page on the WisdomTree website[23].

Low-Risk Dividend Fund #5: Vanguard High Dividend Yield ETF

Vanguard 5 Low Risk Dividend Funds    and 3 Aggressive High Yield ETFsExpense ratio: 0.13%
1-Year Return:
22%
Dividend Yield:
3.3%
Net Assets:
$5 billion
Top Holdings:
Exxon Mobil (NYSE:XOM[19]), Microsoft (NASDAQ:MSFT[24]), General Electric (NYSE:GE[20])

Keeping with the low expense nature of Vanguard, the Vanguard High Dividend Yield ETF (NYSE:VYM[25]) is pegged to the FTSE High Dividend Yield Index and ensures a bigger payday without paying more in fees for management. Consumer staples represents 19% of the fund; next in line, it’s a toss up between energy, industrials and health care, all at 12% apiece. The outperformance and low cost of this ETF make it attractive.

For more info, visit this ETF’s page on the Vanguard website[26].

Now, for those more aggressive high-yield funds:

High-Yield Aggressive Fund #1: WisdomTree DEFA Fund (NYSE:DWM)

WisdomTree185 5 Low Risk Dividend Funds    and 3 Aggressive High Yield ETFsExpense ratio: 0.48%
1-Year Return:
-2%
Dividend Yield:
4.1%
Net Assets:
$400 million
Top Holdings
: China Mobile (NYSE:CHL[27]), Vodafone (NASDAQ:VOD[28]), HSBC Holdings (NYSE:HBC[29])

The DEFA in WisdomTree DEFA Fund (NYSE:DWM[30]) stands for Dividend Index of Europe, Far East Asia and Australasia. This makes the Wisdom Tree ETF an emerging-market play — but one with a high yield above 4%. Just make sure you know you’re getting into a global investment here if you want to play ball. The expense ratio is reasonable; however, the share performance in the red over the last 12 months is a sign that you can take a beating, even if you’re getting bigger dividends with this fund.

For more info, visit this ETF’s page on the WisdomTree website[23].

High-Yield Aggressive Fund #2: Powershares International Dividend Achievers

Expense ratio: 0.58%
1-Year Return
: 3%
Dividend Yield:
3.4%
Net Assets:
$620 million
Top Holdings:
Telefonica (NYSE:TEF[31]), Teekay LNG Partners (NYSE:TGP[32]), AstraZeneca (NYSE:AZN[33])

The Powershares International Dividend Achievers (NYSE:PID[34]) fund is based on the International Dividend Achievers Index, and as such you should expect global exposure in your portfolio. Like DWM, the share performance lags the S&P significantly due to global stocks and their volatility. Only 15% or so of the fund is in the U.S., with the largest portion of investments in the U.K. and Canada. Telecommunications represents 19% of the fund, and energy is the second most heavily weighted sector at 17%. Something to note, though: Top holding Telefonica recently suspended its dividend[35], so don’t expect it to remain in PID for much longer.

For more info, visit this ETF’s page on the Invesco PowerShares website[36].

High-Yield Aggressive Fund #3: Powershares High Yield Equity Dividend Achievers

PowerShares185 5 Low Risk Dividend Funds    and 3 Aggressive High Yield ETFsExpense ratio: 0.62%
1-Year Return:
18%
Dividend Yield:
3.7%
Net Assets:
$200 million
Top Holdings
: Pitney Bowes (NYSE:PBI[15]), Old Republic International (NYSE:ORI[37]), Vector Group (NYSE:VGR[38])

The Powershares High Yield Equity Dividend Achievers (NYSE:PEY[39]) fund is based on the Mergent’s Dividend Achievers Index, and includes smaller and riskier stocks in pursuit of bigger dividends. Of particular note is the high exposure to financial stocks — about 25% of the portfolio is in this admittedly volatile sector. Of course, the 33% in utilities does add some stability to offset that. But given the uncertain state of financial stocks (and the high expense ratio), this should be considered a riskier play for dividend investors. This also is a smaller fund with lower volume, and that adds a bit to the riskiness.

For more info, visit this ETF’s page on the Invesco PowerShares website[40].

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[41] Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.

Endnotes:
  1. “double dividend” fund: http://investorplace.com/2012/05/double-dividend-funds-slow-down/
  2. beware of chasing yield: http://investorplace.com/2012/07/chasing-yield-love-dividends-but-diversify/
  3. fear of a bond bubble: http://investorplace.com/2012/08/dont-call-a-top-in-tlt-but-be-prepared/
  4. WMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=WMT
  5. KO: http://studio-5.financialcontent.com/investplace/quote?Symbol=KO
  6. PEP: http://studio-5.financialcontent.com/investplace/quote?Symbol=PEP
  7. VIG: http://studio-5.financialcontent.com/investplace/quote?Symbol=VIG
  8. visit this ETF’s page on Vanguard’s website: https://personal.vanguard.com/us/funds/snapshot?FundId=0920&FundIntExt=INT
  9. LO: http://studio-5.financialcontent.com/investplace/quote?Symbol=LO
  10. LMT: http://studio-5.financialcontent.com/investplace/quote?Symbol=LMT
  11. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  12. DVY: http://studio-5.financialcontent.com/investplace/quote?Symbol=DVY
  13. visit this ETF’s page on the iShares website: http://us.ishares.com/product_info/fund/overview/DVY.htm?fundSearch=true&qt=DVYhttps://personal.vanguard.com/us/funds/snapshot?FundId=0920&FundIntExt=INT
  14. AVP: http://studio-5.financialcontent.com/investplace/quote?Symbol=AVP
  15. PBI: http://studio-5.financialcontent.com/investplace/quote?Symbol=PBI
  16. T: http://studio-5.financialcontent.com/investplace/quote?Symbol=T
  17. SDY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SDY
  18. visit this ETF’s page on the SPDRs website: https://www.spdrs.com/product/fund.seam?ticker=SDY
  19. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  20. GE: http://studio-5.financialcontent.com/investplace/quote?Symbol=GE
  21. DLN: http://studio-5.financialcontent.com/investplace/quote?Symbol=DLN
  22. recession-proof industry: http://investorplace.com/2012/07/5-health-care-mutual-funds-to-buy/
  23. visit this ETF’s page on the WisdomTree website: http://www.wisdomtree.com/etfs/fund-details.aspx?etfid=20
  24. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  25. VYM: http://studio-5.financialcontent.com/investplace/quote?Symbol=VYM
  26. visit this ETF’s page on the Vanguard website: https://personal.vanguard.com/us/funds/snapshot?FundId=0923&FundIntExt=INT
  27. CHL: http://studio-5.financialcontent.com/investplace/quote?Symbol=CHL
  28. VOD: http://studio-5.financialcontent.com/investplace/quote?Symbol=VOD
  29. HBC: http://studio-5.financialcontent.com/investplace/quote?Symbol=HBC
  30. DWM: http://studio-5.financialcontent.com/investplace/quote?Symbol=DWM
  31. TEF: http://studio-5.financialcontent.com/investplace/quote?Symbol=TEF
  32. TGP: http://studio-5.financialcontent.com/investplace/quote?Symbol=TGP
  33. AZN: http://studio-5.financialcontent.com/investplace/quote?Symbol=AZN
  34. PID: http://studio-5.financialcontent.com/investplace/quote?Symbol=PID
  35. recently suspended its dividend: http://investorplace.com/2012/08/the-dividend-disappointments-keep-coming/
  36. visit this ETF’s page on the Invesco PowerShares website: http://www.invescopowershares.com/products/overview.aspx?ticker=PID
  37. ORI: http://studio-5.financialcontent.com/investplace/quote?Symbol=ORI
  38. VGR: http://studio-5.financialcontent.com/investplace/quote?Symbol=VGR
  39. PEY: http://studio-5.financialcontent.com/investplace/quote?Symbol=PEY
  40. visit this ETF’s page on the Invesco PowerShares website: http://www.invescopowershares.com/products/overview.aspx?ticker=PEY
  41. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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