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Go Global With Dividend ETFs

Don Dion

11/09/11 - 06:00 AM EST
NEW YORK ( TheStreet) -- With the European debt crisis falling back into focus, investor fears that were put on the backburner during October have witnessed a comeback. Investing in this type of choppy market environment will require patience and flexibility.

For conservative investors, it may be tempting to flee from risky assets and ride out the market storms in shelter. While long-term U.S. treasuries and cash may provide some welcomed comfort during periods of market duress, such a strategy will keep an investor from potential gains in the event of a turnaround. Rather than let market headwinds deter investors from taking on equity exposure, dividend-paying stocks will likely be better way to navigate the market's volatility.

There are number of ETFs that investors can turn to when taking on exposure to income-bearing companies. In the past, I have pointed to such funds as the iShares Dow Jones Select Dividend Index Fund (DVY), SPDR S&P Dividend ETF (SDY) and the iShares High Dividend Equity Fund (HDV).

Each of these three funds has shown standout strength throughout the past few months of rocky market action. The 9.2%, 9.6%, and 7.6% gains seen from DVY, SDY, and HDV, respectively, have handily surpassed the performances of broad index-tracking funds such as the SPDR S&P 500 ETF (SPY) and the SPDR Dow Jones Industrial Average Index Fund (DIA).

In addition to this outperformance, investors equipped with these products have enjoyed substantial yields. Looking ahead, these payouts are expected to increase. According to a report from InvestmentNews, annual payouts from companies comprising the Dow Jones Industrial Average are forecasted to rise by as much as 12%.

DVY has long been a staple holding across a number of my client portfolios and given the looming hurdles facing the global economy, I see no reason to shed exposure at this time. The current performance and future outlook for domestic dividend stocks appears promising. However, there are other ways to target yield-paying equities.

For example, investors willing to take on some additional risk may want to consider taking a look at the PowerShares International Dividend Achievers Portfolio (PID). PID expands its reach beyond the domestic borders, providing investors with exposure to top income-paying firms from developed and emerging regions.

Some of the nations representing substantial portions of PID's portfolio include the U.K., Canada, Israel and Mexico. Major holdings include Partner Communications (PTNR), Telefonica (TEF), AstraZeneca (AZN) and National Grid (NGC).

PID's reach is not entirely foreign, however. The fund still sets aside more than 7.5% of its index to U.S.-based firms. This domestic component should help to tone down the fund's volatility over time.

Like DVY, PID has managed to handily beat out the performance of other broad world indices in recent months. Since early August, the fund has gained more than 2%. The Vanguard Total World ETF (VT), meanwhile, has jumped less than 1% over this time period.

With Europe's economic woes back in the spotlight, there is a strong chance that investors will be greeted to volatility in the days and weeks ahead. Though overwhelming at times, I encourage investors to avoid letting these global macroeconomic headwinds scare them out of the markets entirely. Dividend-yielding equity ETFs like DVY and PID can help make the current environment more bearable.

Written by Don Dion in Williamstown, Mass.


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