Dividend ETFs have traditionally been attractive as a steady income generator and defensive play. During the Financial Crisis, however, dividend ETFs suffered from overexposure to financial firms. Banks and insurance companies were throwing off cash in large amounts, but these were not the safe, predictable dividends of previous eras. These were dividends paid out of fees from inadvisable real estate loans. When financials cratered, dividend ETFs took it on the chin.
There is reason to believe that dividend stocks are once again a steady income producer and defensive instrument. Sector holdings in the SPDR S&P Dividend ETF (NYSEArca:SDY), for instance, are spread out better than previously:
Financials are about half as important as they were in most dividend ETFs. None of the sectors above are at frothy valuations. Absent as usual is technology, whose companies traditionally use every spare dime to fund new growth.
Other major ETFs in the area include Vanguard Dividend Appreciation ETF (AMEX:VIG), Vanguard High Dividend Yield ETF (AMEX:VYM) and WisdomTree Total Dividend ETF (NYSEArca:DTD).
A good stock yield these days is 3-4%. This is still strong relative to Treasuries which pay out negligible rates. Investment-grade bonds are in mid-single digits but offer no equity upside. Bond experts like Bill Gross are so dismayed by low bond yields that they are touting high-yield stocks even though they have few funds in the asset class. Unlike fixed income where the only danger is inflation and rising interest rates, dividend stocks also have fundamental economic risk. This low inflation environment, if it does not descend into true deflation, is ideal for dividend stocks. Benjamin Graham, the father of fundamental stock analysis, who often valued companies on the basis of their expected future dividend payments, would be pleased with their outlook.
For specialized dividend ETFs, WisdomTree is the clear leader with dozens of offerings: