Investor sentiment remains on the negative side and the economic data continues to feed the negative emotions. Scanning the sectors we find plenty of volatility along with a flight to quality. The bond ETFs have been the leaders as money rotated to safety. As a result of the shift to safety, as well as the Fed intervention, interest rates have moved lower. The short end of the yield curve stands below 0.5% on the two year Treasury bond and 2.6% on the ten year. The move lower in dividend yields has prompted investors to look for alternatives to bonds.

Last week we discussed REITs (Real Estate Investment Trusts) as an alternative investment and they remain an option. This week I want to look at dividend producing stocks. As investors shift their attention to the dividend/income side, they cannot forget to measure and adjust for risk. This has been my biggest warning for investors  over the last 12 months. Never buy an investment you don’t understand, first and foremost, and always understand the risk of any investment before you invest. Establish a defined strategy and follow the plan with a defined entry, stop and target.

 ETFs (Exchange Traded Funds) offer a variety of opportunities when it comes to dividend producing stocks. The obvious place to start is the bond ETFs, but currently we are looking for stocks producing dividends. DVY, iShares Dow Jones Select Dividend Index ETF is the most recognized in this category. The fund’s objective is to invest 90% of assets in the index stocks to best replicate the index. Currently 99% of the fund is individual stocks. The three largest sectors in the fund are industrial materials, utilities and consumer goods. They account for more than 65% of the fund allocation. The fund is invested in stocks and thus has volatility reflected by the Beta of 0.93. This means the fund has a 93% correlation with the S&P 500 index benchmark for risk. This shows some of the risk related to holding these type of funds.

The current dividend yield is 3.8%, compared to 0.5% for the 2 year Treasury or even the 2.57% for the 10 year Treasury. You are being rewarded for the increased risk. The average P/E of the fund is 15.8 with 101 holdings. Taking time to understand the fundamentals are important if you are looking to hold the fund longer term. This fund is designed to hold longer term to benefit from both dividends and growth.

Other options in this category are worth filtering for the more boutique offerings:

DOO, WisdomTree International Dividend ex-Financials ETF is designed to find high yielding stocks outside the financial sector. The top three sectors are Telecom, Utilities and Energy which account for 45% of the fund. The dividend is 5.6%, P/E is 12.8 and international focus is great for portfolio diversification with no correlation to the U.S. markets.

IDV, iShares Dow Jones International Select Dividend Index ETF is designed to track the index of a select group of stocks which have provided high dividend yields on a consistent basis over time. The top sectors are Financials, Industirals and Consumer Services accounting for 48% of the fund. More risk with the financial exposure, but the dividend was 7.4% over the past year.  The current yield is 4.4%, P/E is 16.5 and the beta is 1.17. The fund offers potentially higher yields, but it comes with higher risk relative to the funds design.

The push towards dividend yield is on the rise and these ETFs offer the investor some alternatives worthy of consideration. Take the time to review and understand before putting your money to work. Exchange Traded Funds offer the opportunity to participate in a diversified portfolio of stocks benchmarked to a specific index allowing you full transparency of the holdings.