The first camp — which Johnson calls the growers — is comprised of ETFs investing in companies that have maintained and grown their dividends over time. Such funds include the Schwab U.S. Dividend Equity ETF, the Vanguard Dividend Appreciation ETF and ProShares S&P 500 Dividend Aristocrats. Investors in these funds, said Johnson, need to keep in mind that they may be in store for a bumpy ride.
"Valuations matter, and high-quality dividend-paying stocks look fairly rich," he said. "Secondly, stocks are not bonds," Johnson added. "This is equity risk you are assuming, and it will be accompanied by equity-like volatility."
The next camp — which Johnson calls the yielders — is made up of ETFs investing in companies paying higher-than-normal dividends. These firms tend to compensate investors for the fact that their dividends may not be sustainable based on current fundamentals or future performance.
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"The yielders have equity-like risk that is probably higher than broad stock-market risk," said Johnson, referring to ETFs such as Vanguard's High Dividend Yield ETF. "It is certainly higher than the level of volatility you would experience with a portfolio made up of dividend growers."
Indeed, the hunt for yield has driven investors to some of the most volatile corners of the ETF universe, whether it's the junk bond market or master limited partnerships owning companies involved in energy exploration, production or transportation.
"People are looking to supplement the yield they're getting from traditional fixed income by adding or rotating into these high-yield or alternative fixed-income products," said Elliot Van Ness, director of research and a portfolio manager at Rinehart Wealth & Investment Advisory, a fee-only firm.