ETFs Pay Dividends Too
You already know that exchange-traded-funds (ETFs) offer an easy way to quickly take positions in hot market sectors and then jump out when the action cools. But, did you know that ETFs also work for dividend investors?
In fact, many new dividend-paying ETFs have come on the market in recent years. They offer dividend investors a way to collect steady income while enjoying the relative safety of a diversified portfolio. Moreover, you can now find dividend paying ETFs that focus on the hot technology and biotech sectors.
Pharma & Biotech
Pharmaceuticals, including biotech, have been strong for several years running. For example, PowerShares Dynamic Pharmaceuticals (PJP) , one of the strongest players in that sector, has returned 36%, on average, annually, over the past three years, and 33% over five years. By contrast, the overall market, at least as measured by the S&P 500, has gained 17% and 14% over the same timeframes. With PJP, you’ve got all the big players covered. Top holdings include Pfizer (PFE) , Celgene (CELG) , Eli Lilly (LLY) , Bristol-Myers Squibb (BMY) , Biogen (BIIB) and Gilead Sciences (GILD) . PJP pays quarterly dividends, currently equating to a 2.6% yield (next 12-month’s dividends divided by the price you pay for the shares).
Technology is another hot sector, and the First Trust NASDAQ Technology Dividend ETF Fund (TDIV) holds many of the biggest players, including Apple (AAPL) , Cisco Systems (CSCO) , IBM (IBM) , Microsoft (MSFT) and Intel (INTC) . First Trust is a relatively new fund (August 2012 IPO), so we can’t look at three- and five-year returns. However, TDIV returned 31% in 2013 and 16% last year, roughly matching the overall market in both years. TDIV also pays quarterly dividends, currently yielding 2.4%.
Focusing on single sectors such as pharmaceuticals and technology exposes you to the risk that those particular sectors could go out of favor in an otherwise strong market. You could mitigate that risk by instead investing in growth stocks in general.
WisdomTree LargeCap Dividend (DLN) , which holds a diversified portfolio of US-based large-cap stocks, is a good way to do that. Its top holdings include Apple (APPL), General Electric (GE) , Exxon Mobil (XOM) , AT&T (T) , Verizon Communications (VZ) , and Johnson & Johnson (JNJ) . The fund has returned 15%, on average, annually, over both the past three- and five-year periods. DLN pays monthly dividends equating to a 2.4% yield.
Large banks and other financial stocks have generally underperformed in recent years. If you like large-cap stocks, but want to avoid those categories, WisdomTree Dividend Ex-Financials (DTN) might be a good choice. It holds a diversified portfolio of US based large-caps. However unlike Wisdom Tree LargeCap Dividend, DTN avoids financial stocks and holds a mix of growth and value-priced stocks. Its top holdings include Verizon Communications (VZ). Kraft Foods (KRFT) , Williams Companies (WMB) , Reynolds American (RAI) and AT&T (T). DTN has returned 16%, on average, annually, over both the past three- and five-years. DTN pays monthly dividends equating to a 3.0% yield.
Real Estate Investment Trusts (REITs)
REITs were hot last year and Vanguard REIT (VNQ) , the largest player, returned 30% in 2014. Its three- and five-year average annual returns were 12% and 14%, respectively. VNQ’s top holdings include Simon Property Group ($SPG), Public Storage (PSA) , Equity Residential (EQR) , Health Care REIT (HCN) , and Prologis (PLD) . VNG pays quarterly dividends equating to a 3.5% yield.
The diversification that comes with investing in ETFs reduces risk...but this is still the stock market. Bear in mind that all five of the ETFs mentioned would drop in a severe market downturn.
For tips and information on the best utilities and dividend stocks from Harry Domash, please check out Dividend Detective.
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