Are Dividend ETFs the Best Income Alternative?

As bonds struggle, investors hunt for income. But not all ETFs are created equal.

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By using this method, Russell looks to bring greater transparency to the stock selection approach while avoiding some of the pitfalls that hit many other products in the space, they said. For example, many other funds concentrate solely on high yields without any scrutiny on financial strength, a situation that can lead to trouble if payouts start to become in danger, they said.

Zacks analysts note: "The concentration risk in HDIV seems to be very high with 50% of asset invested in the top 10 holdings of the company, indicating the fund is not very well spread out. The fund will charge a fee of 33 basis points a year, roughly in line with other products in the space. DVIS, meanwhile, holds a total of 150 stocks with expense ratio of 38 basis points."

[See 3 High-Yielding Fixed-Income Investments.]

A few other dividend ETFs to consider:

Vanguard Dividend Appreciation Index (VIG) tracks companies that have grown their dividends for 10 consecutive years. At nearly $11 billion in assets, it has low annual expenses of 0.18 percent. Its market-matching 2 percent 12-month yield reflects its "safer" approach.

SPDR S&P Dividend (SDY). Quality and distressed companies combine in this fund's 60 highest-yielding stocks of the S&P 1500 that have raised their dividends every year for the past 25 years. With $9.3 billion in assets and a 0.35 percent expense ratio, the fund has a 12-month yield of 3.11 percent.

WisdomTree LargeCap Dividend Fund (DLN) takes a different weighting approach, including only stocks of companies that pay cash dividends weighted in proportion to the dividend payout. The ETF's top holdings include AT&T (T), Exxon Mobil (XOM), Microsoft (MSFT), and General Electric (GE). The ETF has a current dividend yield of 2.6 percent and a very low 0.3 percent expense ratio.

PowerShares Dividend Achievers Portfolio (PFM) is linked to the popular Broad Dividend Achievers Index, which focuses on companies that have increased their annual dividend for 10 or more consecutive years. Top holdings include IBM (IBM), Procter & Gamble (PG), AT&T (T), and Johnson & Johnson (JNJ). The ETF has a current dividend yield of 2.1 percent and an expense ratio on the high side at 0.6 percent.

iShares DJ Select Dividend Index Fund (DVY) tracks the top dividend payers, has some $10 billion in assets, and a 12-month yield of 3.37 percent. Expenses are 0.4 percent. "This fund's fat yield comes from smaller, beaten-down stocks. However, too fat a yield indicates the market's skepticism as to whether the payout is sustainable—and the market is usually right," notes Morningstar.

FirstTrust Dow Jones Global Select Dividend Index Fund (FGD) offers international exposure because it tracks an index that aggregates 24 developed-country benchmarks. Only companies that pay current dividends are considered. The ETF has a current dividend yield of nearly 4.7 percent. Its expense ratio is up there, too, at 0.6 percent.