Time to Invest in Dividend-Seeking ETFs?

Dividend-seeking Exchange Traded Funds (ETFs) gained tremendous popularity after the 2003 federal legislation had slashed the income tax rate to 15% on dividends paid out by corporations. These ETFs were thought to be some kind of dream investment products that invested in solid companies paying dividends and at the same time provided some sort of diversity. Unfortunately, most of them were heavily loaded with big cap financial stocks like Citigroup or Merrill Lynch or Bank of America etc. And, when the time came, all of them slided down -- shoulder to shoulder -- taking with them the aura behind the much appreciated concept of investing in dividend-paying stocks.

All of these ETFs are down by high double digits but we feel probably time has come to load some of those in your portfolio. They are still paying good percentage yield and we can reasonably expect these funds to go up from the current position within a few months. In near term we may see some lower lows but eventually these may benefit long term investors.

Before investing, pay good attention to the ETF's expense ratio -- You must not loose too much part of the dividend in the fund's expenses. Also, you should be aware of a potential negative situation which may arise if, in the beginning of 2009, the new President announces revokement of that 15% tax cap on dividends.

So, today we present a list of eight Exchange Traded Funds (ETFs) which invest in companies that consistently pay out dividend:

In November 2003 Barclays Global Investors introduced the first dividend ETF, iShares Dow Jones Select Dividend (DVY). That fund carries an expense ratio of 0.4%. The timing of its introduction was perfect and it gained a lot taking advantage of the 2003 federal legislation that slashed the income tax rate to 15% on dividends paid out by corporations. The fund's tracking index targets the top 100 domestic stocks by dividend yield, screened by dividend-growth rates, payout ratio and trading volume.

PowerShares Capital Management offers as many as 4 ETFs that invest in income-producing stocks: PowerShares High Yield Equity Dividend Achievers (PEY) , PowerShares Dividend Achievers (PFM) and PowerShares High Growth Rate Dividend Achievers (PHJ) hold U.S. companies, while PowerShares International Dividend Achievers Portfolio (PID) tracks foreign stocks.

State Street Global Advisors manages the SPDR Dividend ETF (SDY), which follows a Standard & Poor's index measuring the performance of the 50 highest-yielding domestic stocks that have consistently raised dividends for at least 25 years.

First Trust Morningstar Dividend Leaders (FDL) is based on a benchmark of about 100 high-yielding companies with a history of consistent payouts.

Vanguard Dividend Appreciation Index Vipers (VIG) is the first dividend-seeking ETF from Vanguard Group and tracks the Mergent Dividend Achievers Select Index. It began trading on the American Stock Exchange in late April and carries a low expense ratio of 0.28%. "Vipers" (short for Vanguard Index Participation Equity Receipts) are ETFs designed as separate share classes of regular Vanguard index funds - in this case the Vanguard Dividend Appreciation Index Fund (VDAIX).

In one of our past postings we discussed relative merits and demerits of iShare's DVY and Powershare's PEY.