Useful Strategies for Utilizing a Dividend ETF

A dividend exchange-traded fund (ETF) tracks a number of high-yield securities in one index. Traditional ETFs use a diversified index as a way of passively creating a portfolio that responds pretty directly to market movement on a whole. These ETFs can be purchased easily, creating an easily diversified portfolio for an individual investor. As the ETF model matured, investment houses realized they could use the option not just to track the market as a whole but also to specialize in certain segments of the market. The dividend ETF is one of these specialized funds.

Dow Jones DJ Select

The Dow Jones DJ Select is a dividend index based on the anticipation of how high-yield-seeking investors think. The analysts at Dow Jones try not just to follow high-yield stocks but actually to anticipate future changes through dividend-weighted modeling. The DJ Select uses quality screens. This is a common term with all dividend ETFs that basically means the stocks will not be considered if they are below investment grade or currently experiencing very high volatility. The DJ Select indexes can trace 50 to 100 securities, giving you a wide range of options.

Morningstar Dividend Index

The Morningstar index is unique because of the way ownership is determined in each of the underlying securities in the ETF. Basically, the dividends paid for each of the securities, or the cash they hand out is totaled into one dividend sum. Then, the percentage of this total amount that is made up by the cash dividends of an individual security is determined. For example, if Stock A contributes $10 to a total dividend sum of $500, then Stock A would be worth 2 percent of the total index. Any investor purchasing an ETF that tracks the index would own 2 percent of his or her total share value in Stock A.

Constant Dividend Growth ETFs

There are a number of other ETFs that focus on securities that have consistently raised dividends over the course of previous years. The S&P, Vanguard and Powershares indexes all use this model. The goal is to consistently increase income on the fund year by year, raising the value of the fund's shares as the value of the underlying shares increase. Therefore, these funds own only high-growth stocks. Many criticize high-growth stocks for being overpriced, but most will not turn away from consistently increasing dividends. 

Which Strategy to Choose

Your goals should be in line with your strategy. If you would like to constantly grow dividends each year, you may choose the constant growth model. If you would like your fund to be distributed proportionately so you own more of the shares that are paying a big chunk of your dividends, go with the Morningstar fund. If you observe the DJ Select and find it is outpacing other models currently, this may be a sign analysts there are doing a great job anticipating the movement of high-yield investors. Remember: high dividend stocks tend to be high-risk as well. An ETC helps diversify to negate risk, but you may still experience losses. 

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