High-Yield Dividend ETFs

Reviewed: November 21, 2014
By FinanceWeb

The Nature of ETF’s

Exchange traded funds are securities traded like stocks during the day. They are based on an underlying collection of assets that are usually some combination of stocks, bonds, or commodities. ETF’s usually have passive, low-cost management. Organizers have traditionally based them on an index such as the SPDR ETF which is based upon the S&P500. More recently the SEC has approved actively managed ETFs. Initially led by Bear Sterns and then grown into a full-blown segment of the ETF industry. The fault many investors have found is the level of fees when low fee passive management captures a wide swath of the market. They duplicate performance of strong groupings such as high dividend companies or large capital stocks such as the S&P 500.

Flexible Approaches

ETFs resemble mutual funds in that the match performances of selected group of underlying stocks or other assets. They trade like stocks and one can buy them in small denominations. The can be sold short, leveraged, and held as options. They are useful in a wide range of investment strategies including various types of hedging. The values are set in close intervals throughout the trading day. Small differences in value occur between the ETF and the underlying assets. They are quickly moved through arbitrage.

Advantages of High-Yield Dividend ETFs

When the fund places a focus on high income and gathers assets that pay high dividends, they create a traditional form of investment. A focus on high dividend companies is a classic method for creating a reliable income stream for investors. High dividend companies can be large or small, and they can include diverse sources such as real estate investment trusts. They can include foreign companies and emerging markets. The advantage of dividend stocks is that the ETF makes money and not primarily equity. The change in the overall markets in the bearish cycles can wipe away years of equity gains. For many investors, dividends are the true way to make money in the stock market. Dividends have accounted for a large portion of the wealth created in the stock market, and a dividend strategy should be part of every portfolio. A dividend strategy should be central to income producing investment strategies.

Investing in High-Yield Dividend ETFs

There are a large number of high-yield dividend ETFs on the market, more than thirty –five funds follow this strategy. An example is SPDR S&P Dividend ETF (SDY). This ETF tracks a high yield dividend S & P index. The index is a collection of sixty companies from the S&P 1500 index. They are large capital stocks that trade slightly under value. These underlying stock companies have raised their dividends over a period of twenty-five consecutive years

High Yield Dividend Opportunities

Emerging markets offer excellent opportunities for high dividends strategies. The leading emerging market indexes are filled with high-quality issuers from Brazil and Taiwan. Some emerging market ETF’s avoid involvements with India and China. The returns on some leading high-yield dividend ETF have been above 7 percent. An example is the WisdomTree Emerging Markets Equity Income Fund. Developed market ETF’s follow a similar approach for high-yield dividend strategies. First Trust DJ Global Select Dividend Index Fund tracks 100 stock companies from the United States, Canada, Australia, and Western Europe. Dividend strategies work in every region and over the entire range of markets. High-yield dividend strategies have a place in every portfolio.