2 Reasons for the Sudden Appeal of High Dividend-Paying ETFs

by: Gary Gordon

Dividend stocks are always on my radar screen, regardless of whether I am inclined at a given time to invest in them. Yet, for some clients, I’ve chosen a number of long-term holdings like Kimberly Clark (NYSE:KMB), Pepsico (NYSE:PEP) and Exelon (NYSE:EXC).

Nevertheless, it appears to be a foregone conclusion that favorable tax treatment of dividends will expire by the end of 2010. Moreover, many a prognosticator believe that the increased taxation of dividend income will adversely affect future investment in high-dividend paying stocks. (And, it may cause a number of investors to sell dividend stocks before year-end.)

That said, historical statistics suggest that at least 1/2 of stock asset total return is attributable to dividend yield. If stock investors are going to count on anything, they may be apt to rely on cash payments… tax consequences be damned.

This is why I found myself particularly focused on the choppy action for the current trading week through Thursday, 6/10. A wide number of dividend payers, and the ETFs that hold them, outpaced the broader market.

Granted, when the markets are falling, one expects dividends stock assets to fall a bit less. These are the companies that folks typically keep for the ongoing cash flow. (Less sellers… less dumping in panicky trading.)

However, in a 4-day period where stocks have gained a bit of ground, dividend stocks still found thmeselves outperforming. Is there a reason for it?

Dividend Stocks, Dividend ETFs and the S&P 500 (6/7-610)
Approx % Gain
Exelon (EXC) 6.35%
SPDR Select Utilities (NYSEARCA:XLU) 4.02%
Pepsico (PEP) 3.90%
Kimberly Clark (KMB) 3.45%
SPDR S&P Dividend (NYSEARCA:SDY) 2.62%
Vanguard High Dividend Yield (NYSEARCA:VIG) 2.50%
PowerShares Dividend Achievers (NASDAQ:PFM) 2.20%
S&P 500 2.20%

I thought of two potential reasons for the sudden appeal. First, some individual stocks and most dividend paying ETFs offer quarterly payments. In anticipation of getting into a position before an ex-dividend date, investors may be bolstering their portfolios via “ye old dividend capture” strategy; that is, buy the equity shortly before the ex-div date to capture the income production.

The second possibility? The CBOE Volatility Index (VIX) has remained at an ultra-high level of 25+ for the better part of an entire month. That kind of price movement leaves far too many advisers, money managers and individual investors scrambling for a lower-risk solution. Dividend stocks and Income ETFs may be part of the solution.

Disclosure Statement: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company and/or its clients may hold positions in the ETFs, mutual funds and/or index funds mentioned above.The company receives advertising compensation at the ETF Expert web site from Invesco PowerShares Capital Management, LLC and Geary Advisors, LLC. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities.