5 ETFs that Pay Dividends and Diversify your Portfolio

Harry Domash |

Free_Photo.jpgETFs 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).

Tech Stocks

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%.

Large Caps

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

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
GE General Electric Co 31.34 -0.05 -0.16 21,401,028
JNJ Johnson & Johnson 111.96 0.58 0.52 6,167,740
INTC Intel Corporation 34.16 0.40 1.18 21,492,534
IBM International Business Machines Corp 160.02 0.20 0.13 2,740,867
SPG Simon Property Group Inc. 179.36 2.54 1.44 1,273,895
GILD Gilead Sciences Inc. 72.42 -0.42 -0.58 9,227,901
CSCO Cisco Systems Inc. 29.25 -0.20 -0.68 27,069,499
EQR Equity Residential of Beneficial Interest 60.50 0.80 1.34 2,080,268
WMB Williams Companies Inc. (The) 30.83 0.81 2.70 6,815,076
VZ Verizon Communications Inc. 49.81 -0.06 -0.12 10,650,716
PSA Public Storage 209.48 1.62 0.78 1,004,064
LLY Eli Lilly and Company 67.71 1.74 2.64 12,272,207
BMY Bristol-Myers Squibb Company 55.96 0.16 0.29 9,281,504
XOM Exxon Mobil Corporation 87.04 -0.20 -0.23 9,706,646
PFE Pfizer Inc. 31.63 0.17 0.54 19,007,839
HCN Welltower Inc. 62.78 1.37 2.23 2,688,595
BIIB Biogen Inc. 297.19 1.41 0.48 1,429,360
CELG Celgene Corporation 117.63 -1.24 -1.04 3,866,633
PLD ProLogis Inc. 49.95 0.00 0.00 3,303,995
T AT&T Inc. 38.61 -0.27 -0.69 16,102,161
MSFT Microsoft Corporation 59.25 0.05 0.08 25,515,665

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