NEW YORK (
) -- 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
or inflation-fear funds like
SPDR Gold Shares
, 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
Dow Jones Select Dividend Index ETF
, 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
Eastman Chemical Company
. 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.
America's population is aging. As investors move toward retirement and look for income-generating funds, it is important to choose funds that not only currently pay a high dividend, but also have expectations of continuing to pay dividends and grow payouts. DVY's screening process helps to screen for consistent dividend payers who will not flame and burn out overnight.
DVY's top holding LO saw earnings impacted by the financial turndown, but managed to gain market share in one of its discount brands. LO's flagship brand, Newport, has maintained a loyal following, while discount brand Maverick gained market share during the economic slowdown. Sales of cigarettes and alcohol have traditionally been recession-resistant, and LO has a strong industry presence.
Eastman Chemical, DVY's second-largest holding, had strong third-quarter earnings on the back of strong results from its CASPI and fibers segments. Lower prices for raw materials helped to improve the firm's profit margin. EMN, whose goal is to increase chemical production derived from coal to 50% from 20%, has strong prospects for the next couple quarters.
Alternatives to DVY include the
SPDR S&P Dividend ETF
WisdomTree Total Dividend ETF
. Out of these three funds, DVY has the highest trading volume. SDY has a similar sector allocation to DVY, but half the number of underlying holdings. SDY and DTD have 0.35% and 0.28% expense ratios, respectively.
-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion Money Management was long DVY.
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.