Reliable Dividends from a Low-Cost ETF

MoneyShow |

Image via 401(k)2012/Flickr CC

Low-cost, high-dividend exchange-traded funds such as the SPDR S&P Dividend ETF (SDY), can help investors find extra income from dividend payments without the risk of having to choose among individual dividend-paying stocks, asserts Jim Woods, editor of Weekly ETF Report.

While individual companies often can pay much more tempting yields than an ETF, with some offering dividend yields of between 5-10%, no company and no stock is immune to market volatility.

It is a lot riskier to “put all your eggs in one basket” than to spread out risk through a dividend-paying ETF, which can hold several hundred companies in its portfolio that pay dividends.

Simply put, investors who receive dividend payments from multiple companies via an ETF will be only marginally affected when one or even several companies stumble, decrease in share price and potentially fail to deliver on dividend obligations. This fact can make dividend ETFs very attractive to risk-averse investors.

Of course, the major concern facing any dividend-paying stock or ETF is a company cutting or omitting its dividend payment, a real threat in uncertain economic and financial times.

SDY’s partial solution to the threat of dividend cuts is to screen for stocks that have at least two decades of consecutive dividend increases, as this implies that the companies paying the dividend can back up the payment with capital growth.

Remember that S&P 500 stocks that pay dividends for 25 years or more are considered “Dividend Aristocrats.”



In terms of performance, SDY has lagged the S&P 500’s year-to-date gain of 11.5%, generating a gain of only 5.22%. However, while the fund will not be dropping the jaws of market analysts anytime soon, its performance over the last few years has been quite respectable -- roughly doubling in share price in five years.

Also, as the chart below shows, there have been no significant and troubling dips during that time. SDY pays a 2.48% yield and has an expense ratio of 0.35%, which is higher than that of other dividend funds, such as those maintained by Vanguard.

With $15.4 billion in net assets, SDY’s portfolio is made up of just over 100 dividend-paying companies with some allocation to all sectors of the market. Its biggest sector holdings are: Financials, 14.75%; Industrials, 14.74%; and Consumer Staples, 14.51%. The fund’s 11% allocation to the struggling Utilities sector may be a concern to some investors.

No position in SDY comprises more than 3% of total assets. The fund’s top holdings show a fair bit of diversification, as well as some household names. They include: AT&T (T), 2.26%; Target (TGT), 2.07%; National Retail Properties (NNN), 1.97%; Tanger Factory Outlet Centers (SKT), 1.96%; and Chevron (CVX), 1.90%.

Investors looking for a basket of companies with two decades of reliable dividend payments may want to consider the SPDR S&P Dividend ETF.

Jim Woods is editor of Successful Investing and Intelligence Report.

Subscribe to Jim Woods' Weekly ETF Report here…

About MoneyShow.com: Founded in 1981, MoneyShow is a privately held financial media company headquartered in Sarasota, Florida. As a global network of investing and trading education, MoneyShow presents an extensive agenda of live and online events that attract over 75,000 investors, traders and financial advisors around the world.

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
CVX Chevron Corporation 119.92 0.29 0.24 4,122,205 Trade
NNN National Retail Properties 42.08 0.49 1.18 662,193 Trade
TGT Target Corporation 61.37 0.28 0.46 3,666,487 Trade
SKT Tanger Factory Outlet Centers Inc. 25.08 0.63 2.58 783,441 Trade
T AT&T Inc. 36.73 0.56 1.55 25,507,437 Trade
sdy SPDR S&P Dividend

Comments

Emerging Growth

Goldrea Resources Corp.

Goldrea Resources Corp is engaged in the acquisition, exploration and development of mineral properties located in North America.

Private Markets

iPRO Network, LLC

We provide the platform, tools, and resources to empower individuals and professionals to market desirable goods and services to the public, taking the place of traditional methods of commerce.

The Green Organic Dutchman

The Green Organic Dutchman Ltd. ("TGOD") produces farm grown, organic cannabis for medical use. The company grows its high quality organic cannabis in small batches using craft growing, all natural…