In an age of low interest rates, dividend stocks that pay out a high dividend yield are especially sought after. They can be the one of the better option for investors looking for equity income.
Dividends are payments by which companies return a proportion of their earnings back to shareholders. Depending on the convention in a country, they might pay out semi-annually, quarterly or even as regularly as monthly.
While dividend-paying companies can be found in various sectors of the economy, some of the best dividend yields are paid by financial, energy, healthcare and consumer staples companies. By contrast, technology companies tend to pay very little to no dividend.
Some stocks would have a high dividend yield, because their share price suddenly dropped whereas dividends have not yet been adjusted – a so-called “dividend value trap”. Such companies carry the risk that dividend will be cut in the future. Careful analysis is needed to mitigate this risk. One way to do so is by assessing which share of profit is paid out in the form of dividend (the so called “pay-out ratio”). Paying out a minority of profit in the form of dividends increases the chance that dividends can be sustained in the future.
You can reduce the investment risk by buying a dividend ETF rather than buying several individual dividend stocks. The VanEck Vectors Morningstar Developed Market Dividend Leaders ETF screens dividend stocks for resilience, seeking to avoid those that might cut payouts. This is done via 3 criteria:
Dividend has been paid-out in the last 12 months
You would only invest in companies which have proven to pay out dividends in the last 12 months.
During the last 12 months, dividend per share was not lower than it was 5 years ago
Indicating realized dividend growth.
The expected forward dividend payout ratio is less than 75%
Avoiding situations in which companies pay-out untenably high dividends.
The ETF is also widely diversified across 100 of the top dividend payers globally.
Risk of Dividend Stocks: Investing is subject to risk, including the possible loss of principal. Investors should be aware of the Main Risk Factors such as foreign currency risk and equity market risk, which are described below and in the sales prospectus.
The VanEck Vectors Morningstar Developed Market Dividend Leaders ETF has generated solid performance in the past.
Past performance is not a reliable indicator for future performance.
The equities, which the index comprises, may be traded in a different currency than that used by the investor. As a result, currency losses may have a negative impact on the return to the investor from the investment. This is a factor to consider when investing in dividend stocks.
The prices of the Fund's securities may possibly be influenced by the risks related to investing in the securities market, such as particular economic situations or an unforeseen decline in value.
For more information on risks, please see the “Risk Factors” section of the relevant Fund’s prospectus, available on www.vaneck.com.