Three ETFs To Focus On Income Producing Securities

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November 22, 2013 6:05pm NYSE:FVD NYSE:PEY

ETFsEven with the return of the taper conversation, stocks have been holding up quite well across the board. However, those that are in the dividend market, who were just starting to see some relief, are probably not too pleased by more

talk of bond tapering by the Federal Reserve.

Higher bond rates make some types of dividend securities less appealing in comparison, and this relationship is the biggest culprit for dividend stocks’ underperformance for much of the year. This, combined with an investor preference for growth securities, has made dividend investing quite difficult over the past few months.

In this type of environment, those looking for income may want to focus on quality over quantity, especially given the number of risks to this corner of the market. Fortunately, there are plenty of dividend ETFs on the market that do just that, and we have highlighted a few of our favorites in this segment of the fund world below:

FlexShares Quality Dividend Index Fund (NYSEARCA:QDF)

This ETF could be a quality income option, using a proprietary model that includes factors like profitability, management, and cash follow. Firms are selected for inclusion in the index based on expected dividend payments, giving the product roughly 200 holdings overall (see FlexShares Debuts 3 Dividend ETFs).

Financials take the top spot in this product, making up about 17.7% of assets. Other top sectors include technology (14.1%), and energy (12.2%), while the product does a good job across individual companies giving no more than 5% to any single stock.

QDF’s 30-Day SEC Yield comes in at 2.8%, making it a solid income destination. The product is also a decent value considering it has a decent sized small and mid cap component (PE of about 20). Additionally, investors should note that it has a modest expense ratio, coming in at just 37 basis points a year.

This FlexShares fund could be thought of as a broad play on the market with a tilt towards dividends. Just keep in mind that the product doesn’t have the highest yield out there, so its potential as a pure income replacement is questionable, though it has shown solid capital appreciation as of late, beating out the S&P 500 over the past month.

First Trust Value Line Dividend Index Fund (NYSEARCA:FVD)

This ETF tracks the Value Line Dividend Index, giving investors exposure to about 166 companies that pay dividends. The fund only holds companies that have a Value Line Safety Ranking of #1 or #2, so the focus looks to be on stable firms (see all the Top Ranked ETFs here).

FVD uses an equal weight approach for individual securities—so company specific risk is tiny—though it does have some concentration risk from a sector look. Utilities take the top spot at 26% of assets, followed by staples (14.5%), and industrials (11.1%).

The fund is a bit pricier than others on the list, charging investors 70 basis points a year in fees. However, it does have a strong value component, and its 30 Day SEC yield of 2.6% easily beats out the S&P 500.

Thanks to these factors, investors can think of this fund as a low risk way to add a little bit in income. However, its cost is a little steep, though the fund has beaten out the S&P 500 (when looking at the NAV return) over the past 10 years.

PowerShares High Yield Equity Dividend Achievers (NYSEARCA:PEY)

This ETF tracks the NASDAQ US Dividend Achievers 50 Index, focusing on 50 stocks for exposure. Securities are selected for this fund based on their dividend yield, and their consistency in growing dividends.

The product is widely dispersed across market cap levels, with just 25% going to large caps, and close to 50% in small cap stocks. From a sector look, utilities dominate at nearly 37% of assets, financials (28.8%), and consumer staples (13.6%) round out the rest of the top three, and it also does a pretty good job of allocating assets to top companies as no single firm makes up more than 5% of the total.

The fund charges investors 57 basis points a year in fees, while it pays out a robust 30-Day SEC Yield of 3.5%. Volume is modest in this fund, though the focus of the product should help promote tight bid ask spreads overall.

This product could be the way to go for those seeking a broad play on higher dividend paying securities, while also keeping a focus on dividend growth too. Just remember, this ETF is a bit concentrated in certain sectors, so it isn’t really a diverse play from that perspective.

Bottom Line

The taper is (seemingly) coming and investors should be glad that this process is finally going to start after months of waiting and speculation. However, the impact of this shift looks to be negative for income-focused ETF investors (see Three Overlooked High Yield ETFs).

For this reason, those that still want a focus on income-producing securities should look to the aforementioned ETFs. These funds don’t pay out the highest yields, but all beat out the S&P 500’s payout and could be more stable plays if a taper does hit the market soon, making them likely dividend outperformers in today’s rocky yield market.

This article is brought to you courtesy of Eric Dutram.

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