The case for owning high-yielding stocks during hard times runs something like this: Consistent dividend payers are, by definition, financially stable or they wouldn’t be able to sustain their payouts. Plus, owning high yielders means you get paid while you wait for better times to return. But over the past year and a half, the lure of dividends proved to be a siren song. The main problem: Financial stocks represented a disproportionately large percentage of big dividend payers.
Nothing better exemplifies the pitfalls of a payout-oriented strategy than iShares Dow Jones Select Dividend Index (symbol DVY). The exchange-traded fund tracks an index of the 100 highest-yielding U.S. companies that have maintained or boosted their dividend over the past five years. In addition, eligible companies cannot have paid out more than 60% of their profits, on average, over the previous five years.
DVY, which we labeled the best ETF in our November 2006 “Best of Everything” issue, dived headfirst into financials from the outset. At its inception, in late 2003, the fund allocated 43% of its assets to financial stocks. Going into 2008, by which time storm clouds had already gathered over the financial sector, the allocation had risen to 49%. That outsize stake in financials played a major role in the fund’s crummy performance of late; it lost 46% over the 12 months ended April 9, trailing Standard & Poor’s 500-stock index by six percentage points.
Full Story: http://www.kiplinger.com/magazine/archives/2009/06/dividend-etf.html