Pair Stock With ETF to Capture Yield, Growth

NEW YORK (TheStreet) -- Dividend investing is becoming increasingly popular as the U.S. equity market continues to log more years without meaningful advancement. Too many people make the mistake of seeking out yield at the expense of price appreciation which is a big mistake. Investors can use both ETFs and individual stocks to construct a narrow-based portfolio that captures both yield and growth potential.

The materials sector is a good place for this exercise as it takes in a lot of themes, brings in a lot of different foreign countries with favorable attributes and has good, long-term prospects behind it -- in my opinion that makes it a good sector to add volatility to the portfolio.

The materials sector has a very small weighting in the S&P 500 so it is unlikely that someone would need to pick six different holdings, two could easily do it. There are not a lot of big dividend payers in this sector but there are some.

There is not much yield to be had from any of the broad-sector ETFs. The iShares S&P Global Materials Sector ETF (MXI) yields about 2.2% but that is only a little more than the S&P 500. As a note, the Materials Sector SPDR (XLB) shows a trailing yield of 3.7%, however this appears to be skewed by an usually large dividend last September. For a comparison, the very similar iShares DJ US Materials Sector Index Fund (IYM) yields about 1.5%.

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So the idea is to pair one ETF and one common stock with some yield, such that the combo yields an average that is greater than the market -- I think adding 100-150 basis points in yield above that of the SPX can still allow a portfolio to be reasonably diversified and capture some good yield which is very important over the long term.

As alluded to above, in choosing a materials sector ETF, I would want something I felt would capture the global theme, or some relatively important slice of the global theme, and some volatility. One example in a broad-based fund is the EG Shares Emerging Markets Metals and Mining ETF (EMT). It is heavy in China, Brazil, South Africa and Russia. The countries are far from one-way trades, but there is a lot happening in the sector with all of these countries. Longer term it would be reasonable to think that if things work out for the materials sector, they would work out for EMT as those four countries continue to be important.

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