The fact that bonds yield as much income as a broken piggy bank has driven investors further down the risk curve as they seek higher dividends. Retirement investors in particular are looking for yields that offer some degree of safety. However, while individual high-yielding stocks are aplenty, they can also bring on too much risk. That’s why ETFs focusing on dividend stocks are a good way to go — after all, diversification reduces risk.
The goal when buying a dividend ETF is not to buy one that is too heavily weighted in one sector. Financial, utility, communications and energy stocks are most likely to pay dividends, but each of these sectors carry stocks that run the gamut across the risk spectrum.
The iShares Dow Jones Select Dividend Index (DVY) is a great place to start. The ETF is diversified across 10 major sectors, with no more than 30% in any one area (utilities). Consumer goods come in at 16.7% and industrials at 16.2%. Its top holding is cigarette maker Lorillard (LO) at 3.5% of assets, followed by a 2.7% weight in Lockheed Martin (LMT), 2.17% in Chevron (CVX), and even smaller holdings in Entergy (ETR) and McDonald’s (MCD). It has returned 23% over the past year and yields 3.43%.
Wisdom Tree MidCap Dividend ETF (DON) is a great choice because — besides its 3.07% yield — it is well-diversified across many different sectors while focused on midcap names. Midcap companies have more room to run than their super large-cap counterparts that pay similar dividends, offering greater possibility for capital gains along the way. The ETF has about 25% in financials, 19% in industrials, 13% in consumer discretionary and 11% in utilties. No holding has more than 1.6% of the ETF’s assets, and that holding is presently Windstream Corporation (WIN). This choice is up 30% during the past year.
For those who can stomach a bit more risk while cutting back on the aforementioned diversification, you can look internationally. There’s much to like about seeking for dividends across international borders, especially if you seek diversification beyond domestic stocks. The SPDR S&P International Dividend ETF (DWX) yields a massive 6.3%, and only one of its top 10 holdings — AstraZeneca (AZN) — trades on a U.S. exchange. DWX holds 22.5% in telecom, 21% in financials and 15% in utilities, and its top 10 holdings make up 31% of its assets. The ETF is up 15% during the past year.
As with all dividend investments, it’s all about that diversification. You might even consider holding all three of these, as they cover entirely different sections of the market.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.