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Summary ETFs can fill critical gaps in a dividend investor’s portfolio, especially for smaller caps and international exposure. Most so-called dividend growth ETFs have average yields in the low 2% range (scarcely above the 2% yield for the S&P 500/SPY). Screening the universe of ETFs by my DGI and qualitative metrics resulted in 7 ETFs with yields from 3% to 7.5% (DIV, EWA, DBEF, FGD, FUTY, VOE, SCHD). These recommended ETFs represent a diversity of strategies and are sorted by yield with commentary as to the pros and cons of each. (click to enlarge) With so much uncertainty in the markets (valuations, Fed, ISIS, Europe, etc), a well-diversified base of investments (especially those that pay a dividend in good times and bad) is critical. However, many people don’t have the time or expertise to assemble their own diversified holdings (this is especially true for smaller cap or international exposure). While Seeking Alpha readers generally like to be stock pickers, ETFs can provide a critical tool to filling the gaps to gaining the exposure that an investor needs but in a package that is much more practical for many. For the dividend growth investor, ETFs are not without their dangers, especially when it comes to chasing yield. A few broad tips: Understand the fund’s holdings – regardless of the marketing materials, it’s the underlying holdings that drive performance. Keep fees low – fund fees subtract directly from any yield. Avoid closed end funds (CEFs) unless you are very confident in the manager and strategy. Understand fund distribution policies to know when and how the yield will be paid. Unfortunately, most of the current offerings for ‘dividend growth funds’ are hardly better than the S&P 500’s 2% yield (as measured by SPY). For example: Vanguard Dividend Appreciation Index Fund ETF (NYSEARCA: VIG ): 2.29% yield WisdomTree U.S. Quality Dividend Growth Fund (NASDAQ: DGRW ): 2.02% yield iShares Core Dividend Growth ETF (NYSEARCA: DGRO ): 2.25% yield As a dividend growth investor that expects yields in the 3%+ range, I have attempted to locate the ETFs that I feel are most appropriate for the DGI investor looking for a meatier yield. To identify the best ETFs out there, I have developed and applied a screening methodology which yielded 7 attractive tickers that I believe investors should consider for their portfolio. Background Since I write for Seeking Alpha primarily to improve my own investment portfolio, I think it is important that you know my objectives. Please consider this context when you look at any advice I give and form your own opinions based on your needs and desires. GOAL: Attractive, risk-adjusted, absolute returns (5-15% annually) over a long-term time frame while minimizing capital loss and extreme drawdowns. STRATEGY: ‘Enhanced’ dividend growth ((NYSE: DGI )) and growth at a reasonable price (GARP) hybrid strategy that focuses on a core of diversified holdings (ETFs and individual companies — my screening criteria are generally: P/E Scalper1 News
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