By Carla Fried
According to Morgan Stanley Smith Barney, exchange traded funds that focus on dividend-paying stocks have attracted more money during the past two and half years than any other broad stock class.
The big boys in the group, the $10.4 billion iShares Dow Jones Select Dividend ETF (DVY) and $9 billion SPDR S&P Dividend ETF (SPY) focus on well-known U.S. dividend payers—the likes of Johnson & Johnson (JNJ), Chevron (CVX) and AT&T (T), all of which have Treasury-beating dividend yields.
A small tasting of what you'll find in these portfolios:
If you've been giving the U.S. slice of your portfolio a dividend tilt of late, what about your international stock allocation? The same argument for dividend payers holds: Companies with a habit of paying out growing dividends (especially if the payout ratio is nice and low) tend to be solidly run outfits that are generating plenty of earnings and free cash flow on an ongoing basis to support the dividend policy.
That can be an especially intriguing way to focus on emerging market stocks if you're a tad queasy about expanding into these faster-growing (and more volatile) markets. Any emerging market stock that pays a dividend is by definition a tad more "established" than a high-flying newbie, and the income payouts can provide some cushion when volatility flares up.
The $3.75 billion WisdomTree Emerging Markets Equity Income (DEM) has a fat 4.2% dividend yield. More important for long-term investors, it has managed impressive total returns since launching in mid 2007, as seen in this stock chart.
In fact, the dividend-focused WisdomTree emerging markets ETF has managed to outpace the $50 billion Vanguard MSCI Emerging Market ETF (VWO) that tracks a broad market index.
One important caveat: Not all dividends paid out by international companies are considered "qualified" by the IRS (and thus eligible to be taxed at the preferential 15% rate, rather than as ordinary income). A workaround is to hold an international dividend payer in your tax-deferred 401(k) and IRA accounts.