Ben Johnson, director of global ETF research at Morningstar, said that these type of companies typically have strong, steady earnings and a clean balance sheet. “They’re profitable and healthy,” he said. “And they have a sustainable competitive advantage to keep competitors at bay.” It’s become apparent to investors that dividend investments, including ETFs, have been resilient in “what has been a brutal downdraft for equities.” He added: “This is their time to shine.”
If you’re already a dividend investor, it’s time to check that your approach is set correctly. If you’ve been neglecting dividends, it’s time to consider a plan.
Here are four questions to make sure you make the most of dividend investing.
1. Is it better to buy individual dividend-rich stocks or dividend funds and ETFs?
The best way to answer this question is by looking at the overall size of your investment portfolio, said Charles Sizemore, a financial advisor at Sizemore Capital Management in Dallas. “If your portfolio is a few tens of thousands of dollars, just buy an ETF or a few ETFs and be done,” he said. “ETFs will pay a decent yield, and the risk is so low. If you own a dividend stock or two and they blow up, it can sink your entire plan.”
Sizemore said only investors with several hundred thousands of dollars should be picking individual dividend stocks.
The ETFs are a low-cost, diversified way to own dividend-paying companies of all stripes, Morningstar’s Johnson said.
“For the vast majority of investors, one steady, high-quality, core low-cost U.S. equity income fund is more than sufficient,” he said.
Either way, it is important to remember that an ETF, even one with a high yield, is not a bond investment. “Dividend-growth ETFs can bounce around a lot,” Sizemore said. “These are stocks, not bonds.” But most of the ETFs in this category are focused on holdings that “have survived Armageddon. So they’re a valid way to play dividend growth,” he added.