A Word About Dividend ETFs

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Dividend ETFs are an important component in income investors’ portfolios. With the need to generate reliable cash flow in today’s zero-interest-rate-environment comes some complacency in that it is assumed that dividend producing ETFs provide a better buffer against sharp market downturns.

I had this conversation with several readers recently, and it is simply an incorrect assumption. Take a look at the above 5-year chart above (courtesy of YahooFinance) comparing the S&P; 500 (SPY) to the widely held dividend ETFs DVY and DTN.

If you follow the crash of 2008 into early 2009, when the market lows were made, you’ll notice that DVY and DTN showed worse performances than the S&P;—by quite a margin.

What that tells you is that dividend paying ETFs are not exempt from bear markets. Consequently, their trends need to be tracked (and stop losses implemented) just like any other equity fund/ETF, if you want to avoid seeing your portfolio get a serious haircut.

Disclosure: Holdings in DVY

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