Is Dividend ETF Investing Risky Business?

Includes: CVY, PEY, VYM
by: Tom Lydon

Dividend exchange traded funds have been the answer for investors seeking an income stream along with the flexibility of a diversified trading tool. But these ETFs are by no means risk-free.

"Beyond individual securities, investments in equity ETFs [that] have stocks that pay high dividend yields emerged as a source of decent income for investors at this time," analysts at Zacks Investment Research said in a commentary. "This has proven to be a pretty good strategy as intermediate-term bonds are still yielding below broad stock markets and equities are rising so far in 2012."

Investors should be aware that dividend stocks are more prone to volatility than bonds and there is always the chance that the yield will be cut, reports Rachel Konning Beals for U.S. News. This is due to market uncertainty and the health of the companies paying the dividends.

This may lead some investors to question if dividend-paying stocks give more value or if plain old stocks are a better way to go. In the case of dividend ETFs, the largest criticism is that particular ETFs may be too concentrated in certain sectors while ignoring others.

The fact is that companies pay dividends to shareholders when they do not need to reinvest the cash. Therefore, businesses in high growth industries use this cash to expand the company.

An ETF is useful to investors if they are willing to look beyond the name of the funds and know what stocks are actually holdings. This way, the diversification benefits can really be favorable and there will be some knowledge about the financial strength of the companies held.

  • Vanguard High Dividend Yield ETF (VYM) yields 2.71%
  • Guggenheim Multi-Asset Income ETF (CVY) yields 4.83%
  • PowerShares Dividend Achievers (PEY) yields 3.89%

Tisha Guerrero contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.