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%. >> Keep the stock market at your fingertips with TheStreet's iPad app. 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.
A narrower example could be the Global X Silver Miners ETF ( SIL). Again just an example, there are many other specialized materials sector ETFs to go with instead of SIL. The two funds provide valid access to the sector, one way or another, have each done differently over the last 12 months (SIL up a lot and EMT up a little) but neither has paid much of a dividend, 1% give or take. That there is not much yield is not a bad thing if they deliver some magnitude of the growth they have delivered over the past few years. Demand for resources globally and the ongoing infrastructure build out in many countries creates visibility for the sector will continue to provide meaningful price appreciation. One example of a stock with a yield that could work here is Southern Copper ( SCCO)). The stock has been around for a while and even though there were a couple of small dividends in 2009 the company has proven it is committed to paying a large dividend with the yield currently at 7.7%. The dividend has been lumpy and should continue to be lumpy as the company is obviously beholden to copper prices. Over the last five years the stock is up 107% compared to about 25% for MXI and a decline of 7.5% for the SPX -- none of those figures include dividends. The 107% is nice of course but it should be noted that SCCO fell far more than MXI or SPX from the 2007 peak. The company has generally tracked the price of copper (both are quite volatile) so barring some major management goof it is likely to continue to track the price of copper for better or for worse and while the dividend is not a certainty the company's track record for this is good. The idea would not be to blindly buy a couple of things mentioned in an article but to do your own research to seek out what segments, funds and stocks resonate with you. Be careful not to make dividends the top priority as this leads to yield chasing, which often ends very badly. But if handled well, this type of combination can produce a yield far above the broad market.
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