Doing the required research to determine which dividend-yielding stocks should be in your portfolio is a daunting task. Consider investing in dividend exchange-traded funds instead.
Investors, roiled by record volatility, have looked high and low for big dividends.
Given that the Federal Reserveplans to keep interest rates at close to zero for at least another three years, dividend investing probably will gain in popularity.
Investing in individual stocks is risky. It's easy to make the mistake of buying a stock with an accidental dividend yield — those that have inflated dividend yields because of a steep drop in the stock price.
An example is Frontier Communications. With a 15 percent yield, it is the highest-yielding stock in the Dow Jones Industrial Average and S&P 500 Index combined.
A safer way to grab higher yields is through mutual funds or ETFs that focus on dividend stocks.
Comparing the two, mutual funds have a history of chronic underperformance versus benchmarks, whereas ETFs tend to be successful in mimicking benchmark indices. Other benefits to investing in ETFs over a mutual fund include lower costs and taxes, ease of trading and higher liquidity.
A total of 18 percent of new inflows into ETFs, or about $450 million, have been put into those that offer dividends, according to Eric Pollackov, managing director of ETF Capital Markets at Charles Schwab.
Ten of the top 20 ETFs are income-generating ETFs.
ETFs mimic the performance of an index, and, while they're passively managed, the underlying index usually is put together based on specific criteria. In the case of dividend ETFs, indices could be based on stocks that have a long history of dividend increases or those with a specific payout ratio, for example.
There are a number of dividend ETFs for sale, but only some will match your objectives.
A few of the top-performing dividend funds include:
Vanguard Dividend Appreciation: This ETF follows the Dividend Achievers Select Index, which includes stocks that have a history of increasing dividends over at least 10 years. This approach takes a look at the historical dividend policy of management and uses that to project how the company will issue dividends in the future.
iShares Dow Jones Select Dividend: The exchange-traded fund is managed by BlackRock and looks to produce a similar performance to the Dow Jones U.S. Select Dividend Index. The index consists of 100 of the highest dividend-yielding securities (excluding REITs) in the Dow Jones U.S. Index.
Further criteria include dividend growth to be flat to positive in all of the previous five years and a payout ratio of 60 percent or less for each stock.
SPDR S&P Dividend: This ETF mimics the S&P High-Yield Dividend Aristocrats Index, which comprises the 60 highest dividend-yielding S&P Composite 1500 Index stocks.
Those stocks have also consistently increased their dividends every year for at least 25 consecutive years, making the growth of capital an important attribute and indicating the high quality of this index.
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