What are dividend paying ETFs?

Generally, dividend paying ETFs fall into one of the following categories: common stock, prefered stock or REITs (Real Estate Investment Trusts). These investments may invest internationally or domestically. Like all ETFs, they are bought and sold on the exchange, are often but not always indexed, are often low-cost and transparent, and are priced throughout the trading day. Dividend ETFs however pay an income, usually on a monthly basis, often with higher payments made at the end of the quarter.

What kind of ETFs pay dividends?

Many of the dividend paying ETFs could be considered value funds. Value companies are generally firms that are considered well-established, profitable, and of course, pay dividends to their shareholders rather than continue to look for new opportunities. Most dividend ETFs focus on industrial and financial stocks as well as local utilities, real estate and consumer cyclicals. These companies can be found in various markets, all the way down to small-caps, a category that puts the net worth of the companies at $2 billion or less.

Do certain dividend ETFs pose more risk than others?

Because investors tend to look for income rather than growth and the volatility that comes with those types of investments, the risks tend to be smaller. As these funds focus on stable companies, the one thing investors should ask is whether the pursuit of yield may be a risk as well? Too high of a yield compared to the price of the stock is sometimes an indication that something is not right with the company. Because this yield is determined simply by dividing the dividend paid by the stock price, the dividend itself is no real indication of how well the company is actually doing. An investor might ask this of the small-cap WisdomTree SmallCap Dividend Index (DES): is chasing yield also involve careful consideration of all of the other factors that impact the company’s worth?

Are preferred stock ETFs less risky?

The answer varies but in short, ETFs focused on preferred stocks for dividends are only slightly less risky than common stock dividend ETFs. Preferred stock is a hybrid debt/equity instrument with lower volatility that common stock. The dividends paid on preferred stocks are generally stable but in no way guaranteed. This particular type of dividend ETF will be more directly impacted by interest rate increases (investor might sell and move to bonds for better yield) or decreases (when the yield might seem too large compared to the price of the stock).

Are REIT ETFs less risky?

Real Estate Investment Trusts or REITs can be a dividend rich investment. REITs are required to distribute 90 percent of its profits to their shareholders. Because REITs are tied to the real estate market in various ways, either physically owning properties or financially invested in mortgages, the risk can be closely tied to the strength of the economy which is tied to the current interest rate.

How can an investor identify the risk in dividend ETFs?