June 5, 2012
Funds for exposure to dividend stocks
The simplest way for investors and advisors to invest in dividend-paying stocks is through ETFs or mutual funds. Currently, those funds have yields as high as 6.8%, but those high-yield funds come with risks. The question is whether the risks associated with higher-yield alternatives are too high. Examining the range of dividend-focused ETFs provides an answer.
Index-based ETFs, such as the SPDR S&P Dividend ETF (SDY) and the Powershares High-Yield Equity Dividend Achievers ETF (PEY) provide a good starting point to explore dividend funds. PEY has a yield of 3.66% and SDY yields 3.11%. SDY tracks the S&P High-Yield Dividend Aristocrats index, which draws from a set of companies that have 25-year track records of maintaining and/or raising their dividends. PEY tracks the Mergent Dividend Achievers 50 Index, which contains domestic stocks with high current yield and consistent growth in dividends.
The yields on SDY and PEY can be used as a baseline for judging other dividend-paying funds. The SPDR International Dividend ETF (DWX), for example, nearly doubles their yields at 6.37%.
How do we compare the relative tradeoff of yield vs. risk between SDY and PEY and a fund like DWX? A simple but highly informative measure is to compare yield and historical volatility. The table below compares the yields of a number of stock ETFs with high dividends to their historical volatilities. I selected this list of ETFs using a screen for equity funds with the highest yields, also including a long-term Treasury bond ETF (TLT) for reference. This table is sorted from highest yield (top) to lowest yield (bottom).
High-yield dividend ETFs
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