If you have never heard of this, it’s an ETF (exchange traded fund) which trades like a stock, and is comprised of the 100 highest dividend yielding US based stocks. There are further requirements such as the company must have had positive dividend per share growth in each of the past five years. Also, the company cannot pay out more than 60% of its earnings as dividends. With these details behind us, this ETF now (as of 3/31) yields 4.29%. This is a dividend, which is taxed at either 0% (if you are in the 10 or 15% bracket) or 15% (if you are in a higher bracket). Given the current, near 1% yield, on T-bills, and just above 3% yield on CDs (fully taxable at your marginal rate) the DVY offers an interesting alternative.
If you are considering a purchase, keep in mind, this is a stock index, you may lose part of your investment. But if you have a long term view, I think you’ll find that in the next 5-10 years, you will gain a modest return, in addition to the dividend income, and if you choose to reinvest, you will benefit from the increase in shares, as well as the higher dividends as the market recovers. I am not a stock picker, and not a short term trader. When I put some funds in DVY over the last 6 months, it was with the intention to stay invested for the next ten years.
(At the close on 4/21 DVY traded at $59.17 – close on 8/11 $54.43 (.63 dividend distributed since 4/21), I will update this each month)
Joe
Well, the YTD return is more than 9% loss. Even considering the dividends, one would still net a loss. In other words, it’s still a stock equity, not comparable to the return of either T-bills or CD’s.
Yes, there is still the risks associated with the stock market. The comparison that I draw is this – as people see their CD returns fall, 3% or so right now and just 2.25% after ordinary income tax (at 25%), one can see the appeal of that 4.29% dividend (3.65% after the 15% dividend tax rate). But as I state in the original post, this should only be considered with long term money. As you observe, in the short term, the market goes both ways.
Good question – The index itself, DIA or S&P, don’t include the dividend in their calculations, but when you ‘buy’ the index through an ETF the fund distributes the income. So, if you bought the SPY, you’d actually find over time you ‘beat’ the index. To take it a step further, if you start with 1000 shares and reinvest the dividend, the 1000 shares’ value will slowly lag the index, but the increase in the number of shares will more than compensate.
I understand the D-J index does not include dividends. So, does that mean eft’s such as DIA are ripoffs?