Dividends Lure Investors to Large-Cap ETFs

Now that large-company stocks are paying higher yields than bonds, investors may be lured back to equities, according to Jeremy Schwartz, director of research at WisdomTree Investments.

Ten-year Treasuries are yielding 2.7%, while the SPDR S&P 500 ETF (SPY Quote), which tracks the S&P 500, has a yield of 3.1%. "When you have higher bond yields, there is less of a reason to go into stocks," Schwartz says. "From 1958 until 2008, the 10-year note sold at a higher yield than the market."

The WisdomTree LargeCap Dividend Fund (DLN Quote) is currently yielding 4.6%. Its top holdings include Bank of America (BAC Quote), Exxon Mobil (XOM Quote), General Electric (GE Quote) and Pfizer (PFE Quote). "In a way, this ETF is the S&P 500 of dividend-paying stocks," Schwartz says.

Thirty-four of WisdomTree's 42 equity ETF offerings revolve around dividend-paying stocks. There is no shortage of high-yield equities to choose from, but buying baskets of stocks may be the way to go. "Given the markets' extreme volatility, I am more comfortable diversifying our clients' portfolios through the use of ETFs," said Greg Merlino, founder of Ameriway Financial Services in Voorhees, N.J. "The risk-reward tradeoff is too dicey for individual stocks right now."

Merlino agrees with Schwartz that dividend investing has become more appealing. "It's become more attractive because you are being paid while waiting for the market to recover," he said.

Merlino particularly likes the iShares S&P National Municipal Bond Fund (MUB Quote) for income investors. "When you are looking at Treasuries that pay close to nothing, 3.6% is a pretty attractive yield given that it's tax-free," he said.

Matt Hougan, editor of IndexUniverse.com, says dividend-paying stocks are compelling right now. However, he cautions investors to consider the financial footing of the major holdings of dividend-focused ETFs before purchasing. "There is the risk that companies will cut dividends," he says. "When looking at a dividend-focused ETF, you have to see how concentrated it is in financials. A major theme that we saw play out this year was dividend-focused ETFs placing big bets on financials, and they got punished for it."