Dividend Paying ETFs And Mutual Funds Have Risks Too
The Dynamic Wealth Report
July 2, 2008
Are Dividends Costing You Money?
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.
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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.
A perfect example.
Look at the horrible performance of this fund. I bet you want to avoid
owning ETFs like this.
The chart is on the First Trust Morningstar Dividend Leaders Index Fund
(FDL). 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.
Editor’s Note: Greg, Brian and the rest of the team at Hyperion
Financial want to
wish you and your family a happy and safe Fourth of July. Enjoy the
fireworks! The next Dynamic Wealth Report will be published on
Monday, July 7,
2008.
• Corn ($7.50 per bushel)
Corn is where all of the excitement’s been for the last few weeks.
Monday’s Department of Agriculture report continues to hold prices down,
but that might not last for long. Weather projections from WSI indicate
that the summer may be hot and dry – hurting production. Brazil
announced that recent frosts have destroyed almost 2 metric tons of
their winter corn crop.
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