Sunday, January 20, 2008

Are Dividend ETF's for you?

There is a variety of ETF's out there that focus on many different dividend strategies including but not limited to domestic and international dividend achievers, high-growth dividend achievers, aristocrats and even dividend weighted baskets of stocks. While there seems to be an advantage for the small investor with several thousand dollars to invest in buying a predetermined basket of dividend stocks in terms of paying less commissions for buying one ETF, versus paying commissions on buying separately each and every stock in the index, there are disadvantages as well.

First of all some of these ETF's follow indexes which are updated only once an year. Thus, they might still be holding stocks which have failed to increase their dividend in the past year due to timing.

Second, you might not want to buy certain sectors which you perceive as having further downside possibility. A weak sectors which comes to mind right now is financials, which seems to have a higher than average sector-weight in the plethora of dividend ETF's like the DVY for example.

Third, these ETF's are weighted according to different formulas, which might add to or detract from performance. I myself am a firm believer in equal weighted investing, which outperforms the market by a little over large periods of time.

And fourth the dividends from these ETF's seem to be following an erratic pattern, rather than the stable and consistent growth that their individuals stock components should have been experiencing.

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