Why Dividend-Paying Equity ETFs Are Irresistible To Nervous Investors

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NEW YORK (TheStreet) — In recent weeks, a variety of factors have helped to muddy many investors’ market outlooks.

The ongoing commodities shakeup, concerns about the U.S. debt limit, and the ongoing political and economic turmoil facing regions including Europe, the Middle East and Northern Africa are among the issues that are currently reigniting fears and causing skittish investors to second guess the strength and longevity of the ongoing market recovery.

Given these looming concerns, the relief that comes with sticking to the sidelines may be attractive. However, heading for the exits is not the ideal option at this time. Though rocky, we remain on the road to recovery, and investors who choose to bail out now will risk missing out on any strength in store for when the skies clear down the road.

The ETF industry is laden with funds that are well-designed to ease the minds of jittery investors and prepare them for all types of investing environments. Amidst choppy markets, appropriate exposure to defensive assets such as gold and fixed income can help provide a welcomed dose of comfort and portfolio stability during times of uncertainty.

Dividend-paying equity ETFs such as iShares Dow Jones Select Dividend Index Fund(DVY) and SPDR S&P Dividend ETF(SDY) are two options investors may want to consider when looking for ways to both protect against turmoil and prepare for upward action ahead.

Both DVY and SDY provide investors with expansive coverage of the yield-bearing equity universe and provide investors with payouts of more than 3%. In examining the respective breakdowns of the two funds, however, a number of marked differences come to light.

DVY, the older of the two funds, aims to replicate the performance of the Dow Jones U.S. Select Dividend Index. According to the fund’s prospectus, this index is comprised of 100 companies in the Dow Jones U.S. Index that “have provided a relatively high dividend yields on a consistent basis over time.”

The S&P High Yield Dividend Aristocrats Index, which underlies SDY, meanwhile, seeks to combine the 50 highest yielding companies in the S&P Composite 1500 Index. In order to be considered as an index component, however, a company must have consistently raised its dividend over the past 25 years.

Due to the divergences between their respective indexing strategies, DVY and SDY boast noticeably different underlying holdings. For instance, DVY’s index is heavily geared towards utilities and consumer goods, which together account for over 50% of the fund’s index. SDY, on the other hand, leans more towards the consumer staples and financials industries, which represent slightly over one-third of the fund’s assets.

DVY’s top holdings include Lorillard(LO), Chevron(CVX) and Entergy(ETR). SDY is headlined by CenturyLink(CTL), Pitney Brothers(PBI) and Leggett & Platt(LEG).

While both products will prove effective in providing investors with adequate exposure to dividend-paying companies, DVY has been a consistent outperformer and my personal fund of choice. Aside from outpacing its competitor, year-to-date, DVY has also managed to surpass the broader S&P 500 by a comfortable margin.

This recent bout of economic turmoil may be disconcerting. However, rather than heading for the exits, conservative long term minded investors should view this recent market soft spot as a chance to gear up for future strength. By utilising defensive asset classes and dividend-yielding equities, nervous investors will be able to protect against current headwinds and prepare for profits in the weeks and months ahead.

This post originally appeared at TheStreet.