A Focus On Portfolio Income With ETFs

By Aaron Levitt | April 25, 2010 AAA

Investors looking for good income from their portfolios are beginning to take a hard look at dividends once again, thanks to the Federal Reserve's policies. Yields on fixed income investments such as bonds, CDs and money market accounts are painfully low, while the Fed continues to keep rates down in order to stimulate the economy. Meanwhile, it's almost assured that rates will rise in the near future, in order to calm inflation; investors are feeling anxious about potential losses in bond funds if interest rates rise. Bond prices and their yields move in opposite directions. Combine this with retiring baby boomers needing to replace lost paycheck income, and stock dividends are once again becoming quite attractive.
IN PICTURES: 9 Ways To Use A Tax Refund

Picking Up the Pieces
The financial crisis wreaked havoc on dividends, as companies tried to preserve cash and baton down the hatches. Nearly, $43.8 billion worth of dividends vanished from investors' pockets in first quarter of 2009. This has the distinction of being the worst dividend quarter in history. Things are getting brighter on the dividend front. Of the 7,000 or so publicly traded companies that convey dividend information to S&P, only 48 of them decreased their payouts in the first quarter of 2010. In addition, payouts increased by nearly $6.4 billion during this time. While analysts predict that it might take until 2013 before payouts fully return to their pre-crash levels, a low interest rate environment, plus a whole retiring generation will help dividend stocks surge over the next few years.

Adding that Income
Since the 1960s, dividends have accounted for nearly 65% of the total return of the S&P 500 (NYSE:SPY) in sideways moving markets, similar to the one many analysts are predicting we are about to enter. Capital appreciation tends to move around pretty aggressively, but dividends, in general, are more predictable. Dividends help cushion downward movements in stocks and help boost upside in the markets rallies. There are plenty of different avenues for investors to take in order to pad their portfolios with that income. Individual dividend achievers such as Procter & Gamble (NYSE:PG) make excellent additions. However, using a single exchange traded fund, investors can own a wide swath of dividend payers within one ticker.

The Vanguard Dividend Appreciation ETF (NYSE:VIG) may be exactly what the doctor ordered, when investing in a dividend focused ETF. While the yield isn't the highest, currently at 1.9%, the fund offers the potential for high dividend growth. Investors should look for companies that not only have the ability to maintain the current payout, but grow it over the future to help keep inflation at bay. The VIG does that remarkably well, and holds a portfolio of around 200 blue chip stocks including P&G and Coca-Cola (NYSE:KO).

For investors wanting a larger income stream without really having to move down the quality level into junk, the SPDR S&P Dividend (NYSE:SDY) provides a 3.39% dividend rate. The fund is tracking index screens for stocks of any market cap, that have raised their dividends consistently for the past 25 years. The fund then narrows the list down to the 50 highest-yielding stocks. The SDY is currently heavy with utilities and consumer staples. Investors can also sleep well knowing that all the companies within the index increased their payouts during the 2007-2008 bear market.

Dividend investors shouldn't confine themselves to just the U.S. borders. The SPDR S&P International Dividend (NYSE:DWX) follows a basket of the 100 highest yielding stocks outside the States. The WisdomTree Emerging Markets Equity Income (NYSE:DEM) allows investors to add a "safety net" to their emerging market holdings. The fund invests in the 30% or so of developing nation stocks that pay dividends. While the fund does invest in a volatile section of the market, the dividends should help keep the fund in check and balance out an investment in something like the Vanguard Emerging Markets Stock (NYSE:VWO).

Bottom Line
As baby boomers look to replace paychecks with income streams provided from their portfolios, the interest in dividend investing will only increase. With low interest rates on fixed income products and companies once again opening their wallets, stock dividends make a perfect choice for that income replacement. Using exchange traded funds such as WisdomTree International Small Cap Dividend (NYSE: DLS), investors have easy access to the dividend sector. (For more stock analysis, take a look at The S&P 500's Cheapest Stocks.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Analysis
  1. Chart Advisor

    Traders Fight To Push Corn Prices Higher

  2. The iShares FTSE China 25 Index Fund etf has become popular with investors seeking China exposure. Here's why.
    Stock Analysis

    This ETF Offers Easy Access To China's Big Hitters

  3. Stock Analysis

    New Data Runs Counter - Ahead of Wall Street

  4. These stocks have been weak, and despite rallies, investors might be better served by selling or shorting as opposed to buying.
    Chart Advisor

    Time To Take Profits On These 4 Rallying Stocks?

  5. With its huge population and booming economy, China is tops for many emerging markets investors. Here's a leveraged ETF for those who want to double down.
    Stock Analysis

    This Leveraged ETF Is For China Bulls

Trading Center