Avoiding the Dividend ETF Trap

Dividend-paying stocks are often seen as being higher-quality and more stable than their non-dividend-paying stock counterparts. Thus, they can be viewed as the next step up on the risk/return spectrum from lower-risk bonds to higher-risk stocks. But there is a point at which dividend-paying stocks actually become more risky than the average stock. Earlier this summer, shares of BP offered a trailing 12-month dividend yield of 9%. But the market was correctly forecasting that this dividend would be cut. Another example is New Century Financial, a subprime mortgage REIT that offered a dividend yield of around 18% at the peak of the housing bubble. That dividend did not last long, as the firm filed for bankruptcy when the bubble burst. In this article, we take a look at the ways that dividend-focused exchange-traded funds look to avoid this siren song.... Read more