Case Study: Income Through Dividend ETFs

Case Summary

With low rates on money markets and CDs, investors have turned to bonds in a big way.  However, as we get closer to the day when the Fed changes interest rate policy, bond investors are looking for other ways to supplement the income from their portfolios.

Dividends are making a come back as more companies reinstate them or even hike the dividend payment.  As a result, investor interest in dividend stocks is picking up.


Exchange traded funds are a great way to gain diversified exposure to dividend paying stocks.  Several funds are available and most go beyond the basic approach of weighting the portfolio just on market cap.  Investors can gain access to both domestic and international dividend ETFs, so currency and country risk will also play a role in the investing decision.

Portfolio Recommendations

There are at least 20 exchange traded funds that have dividends as a primary focus.

The largest is the $4.0 billion S&P U.S. Preferred Stock Index Fund (PFF).  With a 30-Day SEC Yield of 6.58% and an expense ratio of 0.48%, this fund is laden with financial stocks.  Top holdings include Ford,Wells FargoBarclays Bank and National City.

A close second is the $3.9 billion Dow Jones Select Dividend Index Fund (DVY).  The 30-Day SEC Yield is 3.85% and the fund’s expense ratio is 0.40%.  Top holdings include LorillardEntergyMercury General, and CenturyTel.

Investors seeking companies that are growing dividends over time should consider the Vanguard Dividend Appreciation ETF (VIG). The 30-Day SEC Yield is 2.16% and the expense ratio is 0.24%.  Top holdings include PepsiCoProcter & GambleIBMWal-Mart and Johnson & Johnson.

For international exposure, consider the International Dividend Achievers Portfolio (PID).  The $400 million ETF yields 3.8% and has a telecom bent with top holdings including Grupo Aeroportuario del Sureste S.A.B. de C.V.TELUS Corp.Mobile TeleSystemsVodafone Group PLC  and BP PLC.

See the ETF Directory for additional investing choices or a complete listing of dividend ETFs.