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Dividend Stocks Making A Comeback
Posted: Jan 26, 2010 08:56 AM by Aaron Levitt
2010 is only a few weeks old and already trends are beginning to emerge. The market seems to be searching for quality assets this year. During 2009, investors poured money into emerging markets and distressed debt, snapping up casualties of the financial crisis that were too good to be true. As technology and similar fast-growing sectors gained, the so called widow-and-orphan stocks have been passed by. The previous year was about a return to risk, this year it's about taking those gains and finding safer investments to put them in. That means a return to value investing for many investors, with a focus on dividends.
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Quality Assets on the Rise
The broad based iShares Dow Jones Select Dividend Index (NYSE:DVY), which follows dividend-focused companies like Lorillard (NYSE:LO), has nearly doubled the return of the S&P 500 through December. Similar dividend-focused vehicles continue to do well. Many analysts believe that the threat of widespread dividend cuts are behind us, as there have been zero cuts in December. This, combined with a growing notion that the overall health of the global economy is increasing, is spurring investors towards dividend-focused investing.
Investors wanting to add a dividend component to a portfolio have numerous different avenues to choose from. There are plenty of individual stocks with growing, treasury-beating dividends, such as Colgate-Palmolive's (NYSE:CL) 2.2% yield. The boom in the exchange-traded fund industry provides investors several ways to add dividend income to a portfolio. While DVY and its sister the SPDR S&P Dividend (NYSE:SDY) get all the attention and hold the bulk of the assets in this space, there are other funds that offer higher yields and different weighting methodologies that could produce better overall returns.
A Couple of Alternative Dividend Picks
With a 5.3% trailing dividend yield, beating both DVY and SDY's distribution of 3.8%, the Claymore Multi-Asset Income ETF (NYSE:CVY) offers investors a way to play the full gamut of equity income options. Aside from common stocks, the fund is allowed to invest in REITs, master limited partnerships, preferred stock classes and closed-end funds. The fund is not limited to domestic issues, so it adds an international component as well. Top holdings include ING's 8.5% Perpetual Preferred shares (NYSE:IGK) and Mark West Energy Partners (NYSE:MWE). Claymore also offers a straight global version of the ETF, Claymore International Multi-Asset Income (NYSE:HGI).
Following 50 stocks selected principally on the basis of dividend yield and consistent growth in dividends, the PowerShares High Yield Dividend Achievers (NYSE:PEY) offers a 4.63% dividend yield. The fund also may be of interest to investors due to the ETF's policy of monthly income distributions. The fund is heavily weighted towards financial stocks, with 39% of assets in the sector.
Vanguard offers an interesting fund in the form of its Vanguard Dividend Appreciation ETF (NYSE:VIG). The fund follows the stocks of companies that have a record of increasing dividends over time. In return for sacrificing current income - VIG currently yields 2.08% - investors have the chance to participate in long-term income potential and greater total returns. The fund follows 186 stocks and has a rock bottom expense ratio of 0.24%.
Bottom Line
Dividends seem to be making a comeback in 2010, as investors look for places to stash gains from riskier asset sales. Exchange-traded fund investors wanting to add equity income to a portfolio have many choices besides the heavyweights of DVY and SDY. By applying different dividend strategies, investors may get better results. The previous three ETF picks are great places to start an alternative dividend search. (Learn about the differences between ETFs and Index Funds in ETF Vs. Index Funds: Quantifying the Differences)
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By Aaron Levitt
Aaron Levitt is an independent investment writer and analyst living in State College, Pennsylvania. His work appears in several high profile publications in both print and on the web. Levitt is an advocate for long term investing with a global framework. You can follow his picks and pans at http://twitter.com/AaronLevitt
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