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Dividend ETFs

Written By Brian Hicks

Posted November 28, 2012

Some investors are always looking for a way to bring in healthy dividends from their investments. ETF Trends’ Tom Lydon explains an ETF that does just that.

The SPDR S&P Dividend ETF (NYSE: SDY) comprises companies that have regularly seen their dividends rise over the past 25 years and weights individual stocks based on dividend yields.

It essentially allows investors to buy a basket of dividend stocks in a single trade.

From ETF Trends:

“The fund’s yield-weighting produces an idiosyncratic portfolio with a strong mid-cap flavor. For instance, the $3.4 billion market-cap Questar Corporation (NYSE: STR) has a greater weight than the $185 billion Procter & Gamble Company (NYSE: PG). Consequently, the fund may occasionally move out of step with its large-cap value brethren. If you’re okay with high tracking error relative to the market, this fund could be a decent core holding. For everyone else, this is a satellite holding,” Samuel Lee wrote for Morningstar in a profile of the ETF.

Of course, the SDY is not alone in weighting stocks by yield; other dividend ETFs include the iShares Dow Jones Select Dividend (NYSE: DVY), a basket of 100 stocks; Vanguard Dividend Appreciation ETF (NYSE: VIG), containing over 100 companies; and WisdomTree Total Dividend (NYSE: DTD), a basket of roughly 900.

Dividend-themed ETFs tend to be popular since they have low interest rates in the bond market.

The idea of dividend investing is built around a short-term investment notion, where investors would rather collect income today than depend on appreciation of capital later, per Lee’s account.

Besides, dividends have tended to beat non-paying companies in the long run.

SDY has a mid-cap focus. The dividend yield is 3.2 percent—not the greatest but still reasonable. Should the fiscal cliff come to pass, S&P Capital estimates that corporations will want to rely on cash for special dividends as well as for stock repurchasing before the new laws kick in.