Questioning The Given on Dividend ETFs and Other Income-Oriented Investments

Russell Bailyn has an article up about WisdomTree ETFs that is a good read. In it he makes one comment that we have all heard before many times which is that "as baby-boomers start retiring, portfolio managers will be allocating portfolios towards dividend and other income-oriented products."

The logic is obvious, and I can't really argue with it but I do question it whether the outcome can possibly be as expected. Specifically, I question whether money allocated to dividend payers in the manner suggested will actually lift prices in some sort of advantageous manner for the people who get in now.

So many people believe it so (it seems) that I don't think it will play out as expected. This strikes as the type of thing that will just turn out to be wrong. I am not saying these types of stocks will do poorly or even be a drag, but simply there will be no out of the ordinary, excess return.

I do believe in yield, but the way I think of it is "What is the yield of the entire portfolio in relation to the market?" You can add 100 basis points in yield quite easily when you add yield in certain sectors like utilities, telecom, energy and of course financials and then add in one or two things, modestly weighted, that yield 7-8%. One example would be a call writing fund. (For anyone new - "modestly weighted" is 2-3% of the portfolio.)

As important as I think dividends are, I think it would be a mistake to own nothing but high yielding stocks. You can't be properly diversified owning nothing but yielders.

Comments

[Frank Li:]

Roger, what are your favorite call writing funds? And would you avoid the dividend ETFs altogether?

Really enjoy your articles -- they're excellent.

2007 Jul 20 09:12 AM

[Roger Nusbaum:]

I am a huge dividend ETF fan, huge. Mentally I have backed up the truck but only mentally. I build portfolios by sector so I really don't use broad-based products too often un less the account is very small.

I mostly use common stocks but use DKA for just about all clients for 1/3 of the energy exposure and DNH for a few folks as a proxy for the financial sector.

The call writing fund that I use most widely is BOE w/at most a 4% portfolio weight but most own it at a 3% weight. Circumstantially there are three clients with MCN.

Thank you

2007 Jul 20 11:20 AM

[Frank Li:]

What worries me about dividend heavy ETFs and stocks is that they tend to be skewed towards REITs, utilities and financials -- all of which are at historic highs in terms of valuation.

When someone buys a dividend ETF, they often don't think "I'm now loading up on REITs and utillities", but that's what they might be doing.

2007 Jul 20 11:31 AM