Dividend ETF

By: EconomyWatch   Date: 30 July 2009

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A dividendexchange-traded fund (ETF) is a passive mutual fund that invests in a basket of high-dividend paying REITs or common and preferred stocks. A dividend ETF is essentially focused on providing a high current income, rather than capital appreciation. Dividend ETFs can be of two types:

  • Those that comprise of only domestic stocks

  • Those that have an international focus

Dividend ETF: How it Works

 

A dividend ETF usually mimics the performance of a part or all of an external dividend stock index. For example, the iShares Dow Jones Select Dividend Index Fund is an ETF that invests in all the stocks contained in the Dow Jones US Select Dividend Index. The dividend yield of the iShares Dow Jones Select Dividend Index Fund is, thus, similar to that of the Dow Jones US Select Dividend Index.

The indexes used to create a dividend ETF depend on the preference of the fund manager or custodian. However, most dividend ETFs contain:

  • High-liquidity stocks

  • Above-market dividend yields

Investors can buy as little as one unit of a dividend ETF or purchase them on margins. Dividend ETFs can be sold through short trading. Since dividend ETFs track indexes from different providers, their performance varies. Some of the popular dividend-based ETFs are:

  • Powershares High Growth Rate Dividend Achievers Portfolio ETF (PHJ): This ETF replicates the High Growth Rate Dividend Achievers Index, which includes the top 100 companies that have the highest ten-year annual dividend growth rate. The companies in this index have been steadily increasing their annual dividend for ten or more successive years. The portfolio in this ETF is rebalanced every quarter and reconstituted annually.

  • Vanguard Dividend Appreciation ETF (VIG): This ETF is an exchange-traded share class of the Vanguard Dividend Appreciation Index Fund, which employs the indexing investment approach to track the performance of the Dividend Achievers Select Index.

Benefits of Dividend ETF
 

Dividend ETFs should be part of the portfolio of stock investors seeking regular income or those who have limited risk appetite. The benefits of dividend ETFs are:

  • Provide more flexibility since they can be traded throughout the day on the NYSE, Nasdaq and AMEX.

  • Provide high current income.

  • Limited to no requirement for the management of individual stocks.


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