There are plenty of ways to generate income for your portfolio, but if you are seeking some relatively stable options for either your regular or retirement portfolio, a few well-chosen exchange-traded funds should be part of your strategy.
ETFs give you diversification within the dividend-paying world, and that means you don’t have to worry about selecting a stock for its dividend but then always wondering if the stock will implode or the dividend get cut. With an dividend ETF, one stock won’t spoil the entire bunch.
The Consumer Staples SPDR (XLP) is a terrific core holding in this regard, because “staples” refers to the things that people always must buy, regardless of the state of the economy. These are the basic necessities, sold by the likes of Procter & Gamble (PG) and Walmart (WMT) and, of course, Philip Morris International (PM).
The ETF yields a solid, if not spectacular, 2.6%. More importantly, when the stock market fell 55% during the financial crisis, this ETF only dropped 30%. Since then, the S&P 500 has risen 125% and this ETF has doubled, making for a nice hedge.
iShares High Dividend ETF (HDV) makes the case for its 3.22% yield by filling up with large positions in many of your standard large-cap dividend payers, like AT&T (T) and Chevron (CVX). I like this ETF because it diversifies its holdings across sectors such as energy, telecom, pharmaceuticals, and tech. Its top ten holdings take up 62% of the portfolio, so it’s pretty cut and dry as far as holding familiar names.
You can give yourself some international exposure by jumping into WisdomTree International MidCap Dividend Fund (DIM), which pays a nice 3.56% yield. This dividend ETF holds a lot of companies to spread its risk around stocks that are growing pretty quickly and still paying dividends. The names won’t be familiar, but the sectors represented are diverse, including insurance, telecom and construction.
It’s always a good idea to have utilities in your portfolio. Utilities have their rates set by government, so assuming the utility is run well, management can properly allocate revenue towards meeting operating expenses, and leave the rest for shareholders. The iShares U.S. Utilities ETF (IDU) pays a very respectable 3.24%, and contains all the big names like Duke Energy (DUK) and Spectra Energy (SE).
Finally, I’d select iShares S&P US Preferred Stock ETF (PFF), which is a dividend ETF that holds a basket of preferred stocks. I love preferred securities. With bonds yielding next to nothing, the next-best thing you can get is preferred stock. It trades like a bond (within a tight range), usually pays quarterly like a bond, and often pays more than most bonds did when bonds were yielding anything. Plus, if the company gets into trouble, preferred stockholders sit ahead of common stockholders.
PFF pays 5.78%. It holds a huge array of preferred shares, but is heavily weighted toward financials. A few years ago, that would’ve made me shudder. However, the financial crisis is over and the winners have emerged. I’m not so concerned about financials, and especially their preferred shares, given that it would take another crisis for all of these companies to melt down.
So before you go jumping head-first into a risky stock with a high dividend, consider a much safer ETF, instead.
As of this writing, Lawrence Meyers was long PFF. 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.