With record stockpiles of cash on hand, dividend-paying companies are thought to be less prone to reducing dividends should sales become a bit rocky—a theory that is making dividend investing look mighty tempting.
In fact, Morningstar analyst Michael Rawson is standing by his statement of last January, that “the yield differential between the 10-year government bond and the dividend yield on the S&P 500 has not been this attractive since the 1950s.”
One way to play this trend is to buy domestic or international exchange-traded funds comprised of dividend-paying companies.
The SuperDividend ETF (SDIV) from New York-based Global X Funds invests in 100 of the highest-paying dividend stocks in the world. Investors have poured $350 million into the fund in less than two years. In a research paper released in the fall, Global X noted that dividend-paying investments also fight inflation. From 1975 to 2011, the average annual inflation rate was 4.23 percent, yet the growth in dividends from S&P 500 stocks was 5.62 percent. “Higher global dividend paying stocks (with yields it puts at 6 percent to 17-plus percent) outperform the broader indexes and non-dividend payers” with higher risk-adjusted returns, the report said.
SDIV has among the highest dividend yielding stocks globally, with the highest component reaching a 19 percent dividend yield, according to a Global X spokesperson.
Some companies will raise their dividend to compensate for a low share price, says Todd Rosenbluth, director of research at Standard and Poors Capital IQ in New York City. However, when yields are already high—at 8 percent to10 percent—companies aren't so bent on attracting new investors, Rosenbluth adds. That's why companies with higher yields of around 8 percent or more are at risk to lower their dividend, he says. Investing in a 100-stock ETF helps to spread that risk. And in this market, he says, “dividend growth is a sign of financial strength.”
Global X distributes to investors all the income SDIV generates, including dividends, during the fiscal year, smoothing out gaps between individual stock dividend payments and payouts to investors by adjusting the NAV. Income received prior to each distribution date is reinvested in the fund.
Another dividend-focused ETF in the international arena that Rawson likes is Powershares International Dividend Achievers (PID), which has a mandate to select companies that have raised their dividends for five or more consecutive fiscal years. PID's 2.6 percent is much lower than SDIV's dividend of 8.33 percent, but is trading now at $17 NAV for investors looking to get in, while SDIV hovers around $23 NAV. They both reflect the higher expense ratios of international funds: PID at 0.56 percent and SDIV at 0.58 percent. Wisdom Tree's DEFA ETF (DWM), which focuses on dividend-paying companies in Europe, Far East Asia and Australasia, is right behind with lower yields of 2.6 percent, and an expense ratio of .45 percent
Domestic ETFs in this category, like SPDR S&P 500 ETF (SDY) with a yield of 3 percent, has an expense ratio of 0.35 percent.
The popularity of dividend ETF investing has increased, says Rawson, and is reflected in higher-priced dividend stocks. Although, he expects that with interest rates at their lows, investors will stay invested.