Why dividend ETFs may be the right thing at the right time

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Risk increases as markets reach record highs

Present-day U.S. stock markets seem to have fully recovered from the recessionary abyss. Markets are reaching peaks higher than pre-crisis levels, with major indices such as the S&P 500 (SPY), Dow Jones (DIA) and NASDAQ (QQQ) surging to record highs. On Wednesday, September 17, the S&P 500 rose 2.59 points or 0.1%, to 2,001.57. The Dow Jones Industrial Average added 24.88 points, or 0.2%, to 17,156.85, while the NASDAQ Composite gained 9.43 points, or 0.2%, to 4,562.19.

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A continuously upward-trending stock market often gives rise to speculation of a bubble. Investors tend to interpret such a trend as an indication that a correction is coming in the near future. Such speculation discourages the bulls of Wall Street, and investors start looking for exit options to book their profits.

Whether it’s the tensions in Russia or the Middle East, or fears about the Fed’s next big move, some investors feel they have plenty of reasons to exit the market and take their profits with them as major equity indices reach record highs. In this climate, a good option for such investors is to consider dividend ETFs such as the iShares Select Dividend (DVY) or the Vanguard High Dividend Yield ETF (VYM).

Choosing the right dividend ETF

Research shows that dividend-paying stocks (with typically lower volatility) tend to outperform non-payers over the long term. So, if you’re a dividend investor, you may want to hold on to your dividend ETFs for a longer period of time.

For total-return investors (price gain plus dividend income), the calculations are different. Dividend funds differ in both purpose and construction. As a result, they display different performance patterns. At the end of the day, investors must take care to choose the ETF that suits their investment purposes. We’ll discuss the various types of dividend ETFs next.

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