When the economy is doing well, people prefer to invest in growth stocks- stocks which are bound to do very well and which would give very good returns on their investment. But when there is economic turmoil, steady income becomes important and the same investors may gravitate towards dividend yielding stocks. However, if the economy worsens even further, these stocks would also be abandoned and investors would flock to bonds and precious metals.
Value investing is one of the oldest equity strategies and is very popular with investors. Investors using this strategy look for companies with high dividend yields and invest in them. This could be done by either investing directly in dividend yielding stocks or buying units of a high - dividend ETF (exchange traded fund).
Just like there are mutual funds which invest in a basket of stocks, there are funds called exchange traded funds or ETFs. These may restrict their investments to only one asset class like stocks or they may invest in a variety of assets. Though mutual funds cannot be bought and sold on the exchange, ETF units can be traded in the market.
An exchange traded fund which invests only in companies with high dividend yields is called a high – dividend ETF.
ETFs use various weighting methodologies to allocate investments. A high - dividend ETF follows the dividend weighting methodology. This kind of ETF is usually based on an index which measures performances of dividend paying companies. The index is dividend weighted to reflect each company’s projected cash dividend based on the latest dividend declarations.
An investor wanting to invest in a high - dividend ETF (exchange traded fund) today, has plenty of options. These ETFs are in great demand in an economic downturn. Their popularity however decreases when equity markets are doing well. At such times, ETFs which are weighted by market capitalization and earnings do much better.
Invest in a high dividend ETF only after considering all its pros and cons and ensuring that it would fulfill your investment needs.