Index Investing for Dividend Investors

Index Investing affords dividend investors several additional opportunities for income. Today the most popular mechanism for index investing is the Exchange Traded Fund (ETF). Advantages include:

1. They closely mimic the index or sector they are designed to track.
2. They are typically not actively managed resulting in low expense ratios and tax efficiency.
3. They trade on the stock market throughout the day.
4. They allow for diversification.
5. They trade like stocks meaning you can use limit orders, sell short, and employ options.

A bond ETF provides a good example to illustrate an ETF's utility. Buying individual corporate or Treasury bonds may be impractical for individual investors because bond denominations could $1,000, $5,000, or even $10,000. This may not allow an individual investor to manage risk or diversify properly. An ETF, in this case an ETF comprised of corporate and/or government bonds, allows the investor to invest a reasonable amount of his portfolio and he achieves instantaneous diversification because the ETF is comprised of a portfolio of various bonds.

Another example is real estate. Individual investors can use ETFs to receive income from the real estate sector without having to actually buy property.

There are thousands of ETFs covering every index, industry, sector, geographic region, investing trend, and social cause imaginable.

We are focused on dividends.

Look Under the ETF's Hood
Before Investing

1. Look at the expense ratio. ETFs are not actively managed andshould have a low expense ratio. Typically less than 1%, often in the 0.1% to 0.5% range.
2. Look at what the ETF is designed to mimic. The fund should publish its "tracking error" which tell you how well the ETF's performance compares to the underlying index or sector.
3. Look at breadth and depth of the sector the ETF is tracking. The ETF industry is so lucrative that financial companies are pumping them out like little bunnies. Some ETFs are made up of a few companies because the industry or sector is so small.
4. Consider how long the ETF has existed. It should have a history of dividends distributions with a consistent dividend growth rate just like any respectable dividend growth company.
5. Determine the ETF's dividend yield like you would for any dividend paying stock. Take the annual dividend distributions from the ETF and divide it by the ETF's price to determine its dividend yield.

A Few Index Investing
Ideas To Consider

• The Best Dividend ETFs


• REIT ETFs


• Utility ETFs

These last two links below are lists of dividend ETFs offered by iShares and PowerShares. The iShares and PowerShares ETFs in these two lists are also included in the three lists above. However, iShares and PowerShares are so popular I broke them out into their own lists for those investors who prefer to stick with these two ETF families.

• A list of dividend ETFs offered by iShares


• A list of dividend ETFs offered by Powershares

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