NEW YORK (TheStreet) -- With numerous factors making it increasingly difficult to predict where bond, equity, and commodities markets will head next, those seeking stability of any sort have turned to financial products which provide a consistent and comfortable pay-out in the form of dividend yields.
A number of major sponsors boast products designed to track indices comprised of a collection of high-dividend paying companies, making the ETF industry particularly well suited to meet the needs of yield- seeking investors. However, although the options are plentiful, it is important to note that not all of these products are identical.
For instance, while two of the most popular dividend-paying exchange traded funds: the
iShares Dow Jones Select Dividend Index Fund
SPDR S&P Dividend ETF
, are similar in that they provide investors with exposure to companies that offer comfortable yields. However, each employs a different strategy to achieve those yields.
DVY is designed to track the performance of the Dow Jones U.S. Select Dividend Index. This basket is comprised of 100 of the highest yielding U.S. companies, excluding REITs.
According to the fund's prospectus, in order to gain admission into this fund's index a company must have offered a consistently high yield over time. The fund's top positions include
SDY deviates from DVY in its approach to seeking dividend yield. The fund is designed to mimic the performance of the
. Rather than simply picking out companies that have boasted a stable yield over time like DVY, this index specifically seeks out firms that have consistently increased their dividends over the past 25 years.
SDY's top positions include CenturyLink,
With slightly over 50 holdings making up its underlying index, SDY takes a considerably more concentrated approach to tracking top dividend payers. In total, the fund's top 10 positions account for 32% of the fund's total portfolio. DVY's 10 largest holdings, on the other hand, represent less than 20% of its total assets.
SDY is slightly cheaper than its iShares competitor, carrying a 0.35% expense ratio compared to DVY's 0.4% expense ratio.
At this time, both SDY and DVY offer nearly 4% yields. However, investors holding SDY do have the opportunity to see even higher payouts because of its unique indexing strategy. This benefit, however, does not come without some added risk.
Because high dividends can sometimes be indicative of higher risk, SDY's quest to single out companies with consistently rising yields may lead it to gain excessive exposure to less stable firms, making it inappropriate for more conservative-minded investors.
The volatile market conditions we have been forced to cope with throughout this past year has made dividend-oriented investment strategies all the rage among investors involved in the ETF industry. However, when picking out an appropriate yield-focused exchange traded fund, it is crucial that you fully understand the differences and similarities inherent within many of these popular products.
-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion Money Management was long iShares Dow Jones Select Dividend Index Fund.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.