In this four-part series, I'll be taking a look at some of the best investments around for adding yield to your portfolio. In Part 1, I highlighted two top-tier actively managed stock funds that incorporate income generation into their investment approach.
In this installment, I'll turn to some of the better "core" stock-centered exchange-traded funds on the market that can help you boost your income power. These are funds that can play a larger role in your core stock allocation. We'll turn to "alternative" dividend-producing stock ETFs in Part 4, but for now, let's focus on well-diversified funds that crank up the dividend juice.
SPDR S&P Dividend ETF (NYS: SDY)
This exchange-traded fund tracks the performance of the S&P High-Yield Dividend Aristocrats Index, which measures the returns of the 60 highest-yielding members of the S&P Composite 1500 that have consistently increased their dividends every year for at least 25 years. That's one of the things that make this fund so attractive -- you don't have to worry about exposure to stocks that have a high yield simply because their price has dropped from some recent difficulties. The only names that make it through the screen here are companies with a long history of successful financial management and strong dividend policies.
With just 60 holdings, the SPDR S&P Dividend ETF is a bit more concentrated than many other dividend-focused funds, but it is still diversified enough to serve as a core dividend holding. Its trailing 12-month yield is a healthy 3.17%, a decent payout for any investor. Over the past five-year period, the fund has posted an annualized 1.7% return. That doesn't seem like a whole lot in absolute terms, but considering the S&P 500 Index was up only 0.7% and the average large value fund up 0.2% in that time, this fund has done well for itself. And it should continue to do well in what looks to be a continued slow-growth environment in 2012, where financially stable market leaders will likely excel.
Vanguard Dividend Appreciation ETF (NYS: VIG) This exchange-traded fund focuses more on the megacap side of the market capitalization spectrum. While the SPDR Dividend ETF has an average market cap of $13.7 billion, Vanguard Dividend Appreciation ETF measures in with an average market cap of $39.6 billion. So here you'll find recognizable blue-chip names like Coca-Cola and IBM landing among the fund's top holdings. This fund tracks the Dividend Achievers Select Index, which also tracks companies with increasing dividends over time. At last glance, roughly 128 names made the cut into the portfolio, the largest portions of which were in the industrial and consumer defensive sectors.
This fund hasn't been around for all that long yet, but in its short life, it has managed to put up one of the most impressive track records in its category. Over the most recent trailing five-year period, the Vanguard Dividend Appreciation ETF was up 2.9% on an annualized basis. That puts it in the top 1% of all large-cap blend funds in that time period. Low 15% annual turnover and rock-bottom 0.18% expenses add to this fund's charms, making it one of the best choices around for large-cap dividend exposure.
While I think large-cap dividend-producers will be the hot spot for dividend-seekers in the immediate future, investors who want to branch out a bit have a few choices for dividend coverage in smaller markets. WisdomTree comes to the rescue here with two options -- WisdomTree MidCap Dividend ETF (NYS: DON) and WisdomTree SmallCap Dividend ETF (NYS: DES) . Both funds invest in several hundred mid- or small-cap companies that pay regular cash dividends.
The indices each of the two funds track are both dividend-weighted so companies that make higher payouts receive proportionally larger representation in the index. Both funds will run you 0.38% in expenses per year, which isn't cheap compared to larger dividend-focused ETFs, but they are still one of the most inexpensive options for gaining direct access to the smaller segment of the dividend-producing market.
Likewise, investors who want to expand their dividend coverage beyond domestic borders might want to consider a fund like the SPDR S&P International Dividend ETF (NYS: DWX) . This fund invests in about 120 high-yielding stocks from around the globe, in both developed and emerging markets. According to Morningstar, roughly 81% of assets are devoted to stocks headquartered in developed nations.
While this fund is a good option for foreign dividend exposure, turnover is high, so investors should be wary about adding this fund to a taxable account. And given the foreign nature of the fund, investors should expect a fair amount of volatility. However, in small doses, this fund could serve as a good complement to your more domestically focused dividend exposure.
Stay tuned for the next installment in this series where we'll take a look at some of the best high-yielding bond funds for your portfolio.
Reaching your retirement goals will require more work than just investing in the best income-producing investments around. Our newest special free report highlights theshocking truth about your retirement. Don't miss this chance to grab your free copy of thiscan't miss reporttoday!
At the time thisarticle was published Amanda Kishis the Fool's resident fund advisor for the Rule Your Retirement investment newsletter. At the time of publication, she did not own any of the funds or companies mentioned herein.The Motley Fool owns shares of IBM and Coca-Cola.Motley Fool newsletter serviceshave recommended buying shares of Coca-Cola.Tryany of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.