The Case for Dividend-Tracking ETFs

NEW YORK (TheStreet) -- While low interest rates and volatile market conditions have pushed many investors into high-yield corporate debt ETFs like SPDR Barclays Capital High Yield Bond (JNK Quote) or inflation-fear funds like SPDR Gold Shares (GLD Quote), there is still a strong case to be made for a core investment in companies that have high dividends and offer income over time.

High-dividend-yielding companies may not always be the most exciting to watch, but they can provide a steady stream of income and value to a well-diversified portfolio. Included in my new ETF Action Portfolio is the Dow Jones Select Dividend Index ETF (DVY Quote), an ETF that tracks approximately 100 of the highest dividend-yielding companies.

High yield can often go hand in hand with high risk, and this ETF is designed to screen dividend-paying companies before including them in the portfolio. The highest dividend-yielding stocks are often companies that have fallen hard and fast in the market, so it is important to have some type of selection process to weed out the more dangerous options.

DVY tracks the Dow Jones Select Dividend Index, and does not include companies that have cut their dividends in the past five years or paid more than 60% of earnings in the form of dividends. REITs, which often pay high dividends but are extremely risky, are omitted altogether.

Currently, DVY's top10 holdings include Lorillard (LO Quote), Eastman Chemical Company (EMN Quote), PPG Industries (PPG Quote), Kimberly-Clark(KMB Quote) and Eaton (ETN Quote). The most heavily weighted sectors in the portfolio are utilities, consumer goods, industrials and financials, with 23%, 20%, 19% and 12% allocations, respectively. The fund has a reasonable expense ratio of 0.40% and a relatively balanced portfolio, with less than 20% of total assets allocated to the top 10 holdings.