Seeking Safety: The Case for Dividend ETFs

If you're not confident in your stock-picking skills, ETFs represent a good option for dividend seekers

Morningstar Europe Editor 6 March, 2012 | 3:28PM
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Given the current environment of persistently low interest rates and uncertainty in the markets, the case for dividend-paying stocks is strong, particularly for income-starved investors. Dividends are one of the few "constants" in the world of investing, (though obviously some dividends are more consistent than others). In fact, many studies have shown that dividend payments have historically contributed at least a third of stocks' total returns. Also, because dividend paying stocks tend to be engaged in relatively steady businesses, they also tend to be less volatile than stocks that don't pay dividends. As such, they are often seen as "safe-haven" investments during times of market volatility. Furthermore, many of these dividend-paying shares offer more than double the 2.0% yield on 10-year UK government bonds. And although they are riskier, they also provide more capital-appreciation potential in the long run, especially as one must assume that interest rates will eventually rise from their current extremely low levels, which will inevitably send bond prices lower.

Finally, dividend-paying stocks can also provide good inflation protection. Empirical studies have shown that those companies that tend to pay out rising dividends generally provide goods and services that are able to keep pace with inflation. For example, utilities can raise their rates fairly easily because they have substantial pricing power. Food and energy companies too find ways to pass on their input costs to consumers.

Dividend ETFs Vary in Their Approaches
In response to investors' interest in income strategies, European ETF providers offer more than 20 ETFs that focus on dividend paying stocks. And while all these ETFs provide liquid and diversified access to stocks with strong dividends, they vary in their approaches.

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