How High Level Investors Can Use ETFs for Income - dummies

How High Level Investors Can Use ETFs for Income

By Paul Mladjenovic

Besides concentrating on gains, you should try to earn steady income in your portfolio, too. Some superb exchange-traded funds (ETFs) concentrate on dividend yield, which deserves consideration for virtually any portfolio.

Dividend-growing ETFs aren’t about stocks from a particular industry, sector, or region. In this category, stocks for the fund are chosen according to specific criteria — in this case, their ability to consistently raise their dividends. Investors don’t choose this type of ETF because of how high the current dividend is but because of how high these funds keep growing their dividends in the future.

A good example is the iShares Dividend Growth ETF (HDV). This ETF chooses stocks that have a track record of consistently raising their dividends, year in and year out, for ten years or longer. That ETF had a 24-cents dividend in 2011, and it grew to over 72 cents in 2015. In other words, in only four years, the dividend grew by 200 percent! Considering how low interest rates were during that time frame and how sluggish the economy was, that’s a noteworthy increase.

But this is a key point in long-term investing: The gains and income become enviable to those impatient folks who aren’t experiencing the same gains. Some folks who bought stocks many years ago today have dividend payments that actually exceed their total original investments! You have the same potential today but with a safer vehicle — an ETF that’s a portfolio chock-full of dividend-growing stocks!

Maybe you’re already retired and you can’t wait for dividend growth, which may mean waiting at least a few years. Maybe you need the income today. Fortunately, some ETFs provide high current income today; just know that those that pay high dividends today probably won’t increase future dividend payouts at the same growth rate as dividend growers.

Success with ETFs isn’t just in what you invest in but in how long you wait. Many brokerage firms give you the ability to reinvest dividends, even if the stock is sitting inside your brokerage account. If you don’t need the money, why not have the dividends reinvested? Reinvested dividends will buy more stock. The dividends will buy fractional shares if they can’t buy full ones.