2010 is becoming the year of the dividend as a common theme for investors. And the mover toward exchange-traded funds, ETFs and ETNs, has been a growing trend for years. So what about marrying the ETF world to the dividend world? The Vanguard Total Bond Market ETF (BND), SPDR Barclays Capital High Yield Bond ETF (JNK), SPDR S&P Dividend ETF (SDY), Vanguard Dividend Appreciation ETF (VIG) and JPMorgan Alerian MLP Index ETN (AMJ) do exactly that.
There are many dividend ETF and ETN products out there which revolve around the dividend theme. First and foremost, these are of course investments in companies and products with the aim of paying dividends back to shareholders. In a perfect world, you could screen for ETFs which have 1 million shares per day traded and those which have five years of operating history. This is not a perfect world, so neither criteria can be used.
There is one problem in some ETF products, and that is the same issue as has been seen in closed-end funds for years. There can some net asset value discrepancy, but there can also be sporadic or irregularity in dividend rates and in dividend payments.
Dividend ETF #1 – SPDR Barclays Capital High Yield Bond JNK
Lets get the junk in the trunk out first. There are many bond ETF products. In the high-yield or junk bond market, you have the SPDR Barclays Capital High Yield Bond (JNK). Here you get to digest high dividends and corporate defaults through time. An investment here almost needs to be tought of on a long-term total return basis. The top holdings here are corporate bonds or preferred shares in HCA, AIG, and GMAC… yum. But it also holds many other positions and tracks the Barclays Capital High Yield Very Liquid index, with at least 80% of total assets in securities that comprise that index.
Since the Feb-2008 launch, the dividend here has never been under $0.30 in a month, but the last dividend trend has been lower at $0.326 in April, $0.331 in March, and $0.346 in February. If you take the most recent dividend an annualize it, you get an annual payout of $3.912 for close to a 10% yield. That also does not include the capital gains distributed at the end of each January. Junk bond ETFs are supposed to have a better tracking to net asset values than the closed-end fund brethren. The closed-end fund universe is a much different animal in all ETFs, but exponentially so in junk bonds.
Dividend ETF #2 – Vanguard Total Bond Market ETF BND
The Vanguard Total Bond Market ETF (BND) offers broad bond market exposure, but not just in Treasuries. Dividends are paid monthly and the average of dividends comes to a current yield of approximately 3.6%. In today’s market, that puts it close to PAR with the 10-year Treasury yield.
This one is for those seeking dividend income from an actively managed bond index rather than those looking for equity-style returns. The credit quality is Treasury and Agency paper, implying ‘AAA-rated’ if such a rating exists in today’s world. The average maturity is an intermediate term, so it isn’t going with the big bets of the Long-Bond but it isn’t going big for the short-term safety net of T-Bills.
This one is far from exciting, but if you reached the point that you can’t handle the volatility of stocks and don’t want to have to worry about default swap spreads and individual or sector creditworthiness then this is the one for you. (Related article: 7 Vanguard funds to dump now)
Dividend ETF #3 – SPDR S&P Dividend ETF SDY
In plain-Jane dividend investing for ‘some’ implied safety, the SPDR S&P Dividend ETF (SDY) offers a tracking of the S&P High Yield Dividend Aristocrats index, which is the 50 highest dividend yielding S&P Composite 1500 constituents that have followed a managed dividends policy of consistently increasing dividends every year for at least 25 years. Here the dividends accumulate and are paid out quarterly. If you average these dividends over the last year the payout is close to $0.43 per quarter, and that generates a yield of roughly 3.3%, but with a price of $50.60 today its 52-week trading range is $36.19 to $50.82.
There are other S&P dividend funds and there are other high-yield funds. With shares at $50.86, the prior 52-week range was $36.19 to $50.82. This on has kept up with many stock funds, with the key difference tha the top six positions (over 20% of the fund) are Pitney Bowes (PBI), CenturyTel, Inc. (CTL), Integrys Energy Group (TEG), Cincinnati Financial Corporation (CINF), Vectren Corporation (VVC) and Eli Lilly (LLY). No big growth nor big tech names on the leader-board here. (Related article: CenturyTel Qwest Merger a Telecom Bridge to Nowhere)
Dividend ETF #4 – Vanguard Dividend Appreciation ETF VIG
Another stock dividend ETF is the Vanguard Dividend Appreciation ETF (VIG), which tracks the Mergent Dividend Achievers Select index that have a record of increasing dividends over time. Its dividends accumulate and are paid each quarter, and it has also seen a decline in dividends through the last year. That will likely change, but the average of the recent dividend would come to almost $1.00 on an annualized basis. That in turn gives this one only a 2% yield based upon a $50.00 price. Its 52-week trading range is $36.57 to $50.30.
This Vanguard product lists its top six holdings as Wells Fargo (WFC), International Business Machines (IBM), Coca-Cola Company (KO), Pepsico, Inc. (PEP), Johnson & Johnson (JNJ), and Wal-Mart Stores, Inc. (WMT). This is not exactly the biggest growth catalyst out there, but it does offer some yield and some stocks deemed defensive and stable if times get tough. (Related Article: Top 10 High Yield Dow Dividend Stocks include Coke, JNJ)
Dividend ETF #5 – JPMorgan Alerian MLP Index ETN AMJ
Individual sector ETFs are always a challenge. The technology ETFs offer very low yields, and the utility ETFs that would normally have a high yield are just riddled with underperforming constituents. Diversified bank and financial ETFs and even regional bank ETFs have cause enough pain followed by enough joy that many investors shied away.
So what is left where plenty of income is around? Check out the energy MLP sector. These have exposure to oil, but in theory are not supposed to have the same volatility of integrated oil players or other sectors in oil and gas.
The JPMorgan Alerian MLP Index ETN (AMJ) is actually an exchange-traded note or an ETN and it has an implied yield on the most current payment of approximately 5.5%, but it is relatively new and its stated quote yield is 6.3%. JPMorgan launched this one in 2009, but Bear Stearns originally had the Alerian MLP ETF back in 2007. Enough said about why it is a new ETF. While this is diversified in the MLP sector, you have to know that the top three holdings at the launch date were about 30% of the index due to their relative size over other Master Limited Partnerships. The top three listed holdings are Kinder Morgan Energy Partners LP (KMP), Enterprise Products Partners LP (EPD), and Plains All American Pipeline LP (PAA). (Related Article: 19 Master Limited Parnerships MLPs with +6% Dividend Yields)
Other High Yield Dividend Investments
Just to show you a diversified fund that is NOT an ETF, this one covers gold and other commodities and is one of the only ways investors can make a dividend in a fund or ETF that is exposed to the gold and mining trade. The Gabelli Global Gold, Natural Resources & Income Trust (GGN) has paid a $0.14 dividend for a high yield getting close to 9.50%. Sam Collins covered this one in-depth, and there is nothing to add except that it can bought on good pullbacks.
