Dividend Paying ETFs And Mutual Funds Have Risks Too

| July 2, 2008 | 0 Comments

Standard & Poor’s conducted an interesting study on the markets.  They found since 1926, dividends contribute nearly a third of total return. Think about that for a moment.  For long term investing one out of every three dollars earned is from dividends.

This is an amazing statistic.  It shows just how important dividends are to a diversified portfolio.

But don’t rush to put all of your money in a dividend yielding stock or fund.  Sometimes dividend investing can actually cost you money.

Everyone knows that investing is a long term strategy.  One of the first rules of investing is:  “know what you’re investing in.”  I know it sounds simple but it’s a rule that’s often forgotten.

So what does “knowing what you’re investing in” have to do with dividends?  Give me a moment to explain.

But first a question.  When was the last time you looked at your portfolio?  Did you look behind the numbers?  Did you look to see what your ETFs or mutual funds actually hold?

Remember ETFs and mutual funds are like baskets.  They hold a number of different stocks.  When a funds’ value goes up or down it’s because the prices of the stocks in that basket have moved.

Now to the point.

It’s important to know what you own.  A big portion of that is looking into the ETFs and mutual funds and understanding what stocks they own.  Even with dividend paying funds.  Despite the comments from S&P about dividends being important, you still need to use common sense. This is when a little bit of knowledge goes a long way.

The fund is designed to capture dividends from a number of companies traded on the NYSE, AMEX and NASDAQ.  It’s made up of 100 stocks chosen for their dividend consistency, excluding REITs.

The fund was started on March 9, 2006 and the IPO price was $20.00.  It managed to reach a high of over $24.  Right now it’s paying a $0.22 quarterly dividend or about $0.88 per year, representing a yield of over 6.1%.

It sounds like a great idea.  But (look at that chart again) there’s obviously a problem.  It’s now down more than 40% from the high.

For the last year the US financial industry has been floundering.  The real estate market blow-up and the subsequent sub-prime mortgage problems have crushed many financial stocks.  The write-offs are in the tens of billions.  Dividends were cut, and layoffs were announced.

Stock prices for financial institutions – including banks – have been falling for more than a year.  Long time Dynamic Wealth Report readers know we’ve been warning everyone to stay away from this industry.

This is where common sense comes in.

This ETF was built on the premise of investing in dividend paying stocks. However, more than 50% of the fund was invested in financial stocks.  If you looked at the holdings you’d have seen this almost instantly. Knowing financials were falling in value you’d have avoided this ETF like the plague.

Take a few moments and look at your holdings. You might be surprised to find out how your ETFs and mutual funds are invested.

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Category: Dividend Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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