5 Dividend ETFs With 5 Very Different Strategies to Boost Your Income

NYSE on April 15, 2013 in New York City.
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Income-hungry investors have been turning more and more to dividend ETFs -- exchange-traded funds that focus on stocks that pay out healthy amounts of income to their shareholders.

Although these funds share a common goal -- boosting investors' income -- all dividend ETFs are not the same. In fact, they can have profoundly different methods for determining which stocks make the cut. Here's a closer look at how five ETFs slice and dice the universe of dividend-paying stocks, and a few things you need to consider if you're interested in adding them to your portfolio.

1. Vanguard Dividend Appreciation (VIG)
This Vanguard ETF seeks out stocks that have a long history of increasing their dividends over time. The index that the ETF tracks starts out by screening for stocks that have raised their dividends every single year for at least a decade, and then applies some additional tests to ensure the stocks it owns are liquid and easily tradable. Currently, the ETF owns almost 150 stocks that have passed those tests.

At just 2.1 percent, the Vanguard ETF's yield is fairly low compared to other dividend ETFs, as current yield is a secondary consideration for the Vanguard ETF. But over time, growing dividend payouts should give investors regular raises in their income levels in future years.

2. iShares Dow Jones Select Dividend ETF (DVY)
This iShares dividend ETF has the same goal as the Vanguard ETF of picking strong dividend stocks with histories of rising payouts. But the iShares ETF goes at it a slightly different way -- first looking at the highest-yielding stocks in the market and then going down the list, picking only those stocks that have current dividends that are higher than their five-year averages and that pay out 60 percent or less of their earnings as dividends.

The result is a greater number of high-yielding stocks in the iShares ETF's portfolio, with the ETF carrying a current yield of 3.7 percent.

3. WisdomTree Emerging Markets High-Yielding EquityETF (DEM)
This WisdomTree ETF takes dividend investors outside the U.S.: Its holdings are in promising emerging-market stocks that pay substantial amounts of dividend income. With stocks from China, Brazil, Russia and more than a dozen other countries, the ETF chooses companies whose dividends rank in the top 30 percent of WisdomTree's broader index of dividend stocks and then buys them in appropriate amounts based on the total amount of dividends they pay.
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This method produces a mix of stocks of all sizes, and its current 3.4 percent yield as measured by the SEC rewards investors for taking on international exposure in their portfolios.

4. SPDR S&P International Dividend ETF (DWX)
This SPDR ETF also has an international focus, but it tracks a broader set of companies coming from both developed and emerging markets. Australia represents the highest-weighted country in the ETF, but you'll also find stocks from across Europe and Asia as well as South Africa, Brazil and Canada. Financial, telecom and utility stocks make up more than half the portfolio, which currently produces an impressive yield of nearly 7 percent.

Given the economic troubles in Spain, Italy and other European nations, those high yields reflect somewhat heightened risk levels, but many income investors will appreciate the extra dividends.

5. iShares Mortgage REIT ETF (REM)
For investors seeking maximum dividend yield, this iShares ETF delivers: Its current yield above 11 percent. The ETF achieves that by owning real estate investment trusts that invest in mortgage securities and use highly leveraged strategies to produce double-digit percentage payouts.

Favorable interest rates have produced strong returns for fund shareholders in recent years, but many fear that a coming rise in rates could send mortgage-REIT dividends falling and jeopardize investments that rely on low rates to produce the income to pay those dividends.

Be Smart About Dividends

Each of these dividend ETFs has a much different risk and return profile. Choose wisely to ensure that you won't take on more risk than you're comfortable with while maximizing your ability to generate income from your investments.

Motley Fool contributor Dan Caplinger owns shares of Vanguard Dividend Appreciation and iShares DJ Select Dividend ETF. The Motley Fool has no position in any of the stocks mentioned. Try any of our newsletter services free for 30 days.

Gold Plunges: 5 Ways to Buy It At a Bargain
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5 Dividend ETFs With 5 Very Different Strategies to Boost Your Income

What's involved: You can buy gold bars or coins from coin dealers across the country. Many coin dealers have online businesses that will ship gold directly to your home.

Pros: You have the gold in your possession, avoiding any risk of third-party misconduct that other methods of investing in gold entail. Some investors enjoy the coin-collecting aspect of gold bullion coins.

Cons: You'll pay a markup to the current spot price to buy physical gold and might have to accept a discount when you sell it back. Also, you have to find and pay for a safe place to store your gold.

What's involved: Some coin dealers offer pool accounts, which allow you to buy gold but arrange to have it stored with the dealer rather than taking delivery. At any time, you then have the option either to sell the gold back or arrange to have the dealer send you a physical coin or bar corresponding to your pool-account position.

Pros: You have all the benefits of owning gold, but the dealer remains responsible for its care. You avoid dealing with shipping and insurance costs and have the assurance that it's held in a secure facility. The premiums for buying and discounts for selling also tend to be smaller than with physical gold.

Cons: To take possession of the gold, you'll have to pay shipping costs and other fees. You also have to trust that the dealer running the pool account will take all necessary steps to protect it from theft or other dangers.

What's involved: Gold futures contracts allow you to buy the right to take delivery of gold at a specified future date. Futures contracts tend to track the changing spot price of gold, paying you profits when prices rise and losing money when they fall. Most futures investors sell back the contract before it expires, never taking delivery of the physical gold underlying the contract.

Pros: You get the potential financial benefits of owning gold without worrying about storing it. You also don't have to come up with the full value of the underlying gold, as futures contracts require only a small margin balance covering a fraction of the gold's total value.

Cons: Futures contracts are only available through specialized brokerage accounts, and there are commissions involved. Most futures contracts may provide too much exposure, as a standard contract corresponds to 100 ounces, worth about $140,000 at current prices. You may have that much in your portfolio to invest, but putting it all into gold futures could give you too much exposure to one commodity.
What's involved: Exchange-traded funds like SPDR Gold (GLD) own vast holdings of gold bullion. Each share of SPDR Gold has a value of just under a tenth of an ounce of gold, and those shares rise and fall with the price of gold bullion.

Pros: Gold ETFs take responsibility for storage and protection of the gold in their possession, saving you the hassle and cost of owning physical gold.

Cons: Although many gold ETFs own physical gold, some gold ETFs use derivatives rather than bullion to track changing gold prices. For those ETFs, you run the risk that the derivatives involved won't move in lockstep with gold prices, potentially causing you to miss out on a gold-price increase.

What's involved: Hundreds of public companies mine gold. When gold prices rise, they earn more for the gold they produce, tying their value to that of the yellow metal itself.

Pros: Unlike other investments, mining stocks can actually produce income. Some miners even pay dividends to shareholders.

Cons: Mining stocks don't always track the price of gold, as other factors such as labor disputes and production costs can cause miners to suffer financial difficulties even when gold prices are high. Lately, gold-mining stocks have had far worse returns than bullion due to rising costs and falling profit margins.


Each of these five ways to add gold to your portfolio has pros and cons. But if you see the value of having gold among your investments, they're all worth considering to give you the gold exposure you want.


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