Dividend paying stocks are becoming very popular among investors. The FT notes investors have been moving aggressively into dividend ETFs since July.
There are many reasons to like these kinds of stocks:
- They tend to be bigger companies that have strong balance sheets & diverse revenue streams
- Given the above, those companies should be less volatile than the overall market and provide some stability of the market moves down
- Relative to small cap equities and low yielding government bonds these companies are attractively valued
- From the middle to the end of a cyclical bull market cycle large caps typically perform the best
The key when buying a dividend paying ETF or stock is that they meet the above criteria. Just because a company pays a dividend doesn’t mean it’s financially strong. The same goes when buying a dividend paying ETF; just because it has a high yield doesn’t mean you are getting quality. Basically, looking only at the yield is a suckers bet. If an ETF yields 6% but the value falls 20% than you still lose.
You need to know your Dividend ETFs. What is the composition? What are the screens? How many stocks are in there? What index do it track? It is imperative you get those answers before you invest.
