Dividend income investing has been increasingly popular due to the yield it provides compared to the depressed yields of other investments such as bond and cash. There are numerous ways to choose investments that pay dividends, each of which has their own risks and rewards.
This article will focus on dividend ETFs. Electronically traded funds, or ETFs, have grown in popularity in recent years in comparison to mutual funds which offered similar benefits.
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Dividend ETFs vs Mutual Funds
Mutual funds and ETFs both allow an investor to invest in a pool of stocks or other investments that limit the exposure of the investor to any one specific position. This diversification thereby can help protect the investor from specific company risk. Unlike mutual funds, ETFs generally do not have upfront fees, known as loads, associated with them, which means your initial investment is not reduced by an upfront fee.
Of course, you still have to pay your typical brokerage commissions, but that will be all. In addition, unlike mutual funds, ETFs are generally liquid investments that allow an investor to enter and exit a position quickly and without the approval of the mutual fund manager. As a result of these advantages, ETFs have increased in popularity and are considered the preferred investing tool for those seeking diversification.
Dividend ETFs Provide Liquid Diversification
Investing in dividend ETFs thereby provide investors with the opportunity to choose liquid investments that pay dividends, in a diversified manner. Therefore, dividend ETFs are able to provide yield to an investor without the risk of one company cutting their dividend leading to a significant reduction in your income from this investment. These dividend paying ETFs provide an investment which allows many investors to sleep well at night, as large dividend paying stocks are among the world’s safest.
There are many different types of dividend paying ETFs available with varying strategies. Some dividend ETFs concentrate on specific strategies such as dividend growth strategies, which involve investing only in companies with a history of increasing their dividends every year. Some dividend paying ETFs follow the “Dividend Aristocrats” index as they select only companies that have increased their dividends for 25 years or more. An example of one of these is SPDR S&P US Dividend ETF (SDY).
Other dividend ETFs use other strategies when choosing dividend paying stocks. An example of this is PowerShares Intl Dividend Achievers (PID), which chooses only dividend paying stocks that are international and therefore provides for dividend diversification from outside the United States. Some investors find certain industries too risky and therefore exclude certain industries from their dividend ETF. An example of this is WisdomTree Dividend ex-Financials (DTN), which does not invest in companies in the financial industry; ironically, the industry that was incidentally, or not, the cause of the recession starting in 2008-2009.
Canadian Dividend ETFs
If you want exposure to Canadian dividend stocks, then the iShares Canadian Dividend Aristocrats ETF (TSX: CDZ) might be an excellent option for you. Another option might be the iShares Canadian Preferred Share Index Fund (TSX: CPD), which will give you exposure to the Canadian preferred shares market, but also provide diversification..
There are a vast number of dividend ETFs that you can invest in to meet your investment goals, each with very specific strategies. By selecting one that meets your investment horizon, you can supplement your income with a growing source of income. While this is true of many dividend paying stocks, dividend ETFs allow investors to do so with the added diversification provided by investing in a dividend ETF. As such, these make a great option for investors designing a portfolio to hold for the long-term.
This article is a part of our free Stocks that Pay Dividends Training Course. Check it out now!