An ETF for Tax-Favored Dividends

03/19/2004 12:00 am EST

Focus:

Evan Simonoff

Editor-in-Chief and Editorial Director, Financial Advisor Magazine

"Getting a measurable level of tax-favored dividend income is no simple matter and relatively few funds offer dividend yields significantly above the market averages," notes Marla Brill in Financial Advisor magazine. "But there are pockets of opportunity, such as this dividend ETF."

"A noteworthy entry in the dividend and income fund category comes from Barclays Global Investors, which launched the iShares Dow Jones Select Dividend Index Fund (DVY NYSE) last November. The fund bills itself as ‘the only exchange traded fund investing solely in dividend-yielding stocks.’ The fund has a 70% correlation to the overall stock market, making it attractive to investors looking for a broad-based allocation of dividend-yielding stocks. The fund's current yield is 3.8%, and it has an expense ratio of 0.40%.

"The Select Dividend Index on which the fund is based invests in 50 of the highest-yielding companies (excluding REITs) in the Dow Jones Total Market Index, a broad-based index consisting of 1,800 stocks. The index has had an average annual return of 6% over the last five years and 11% over the last decade. To qualify for inclusion, the stocks must have a positive historical five-year dividend-per-share growth rate, a five-year average dividend payout percentage rate this is less than or equal to 60%, and annual average daily trading volume greater than $1.5 million. The index is rebalanced once a year in December, and a company’s weight is based on its indicated annual dividend. Altria heads the list of top holdings, with a 4.3% weghting and a 5.4% dividend yield, followed by Honeywell and General Motors.

"The fund's holdings represent a broad mix of large-cap, mid-cap, and small-cap stocks. Financials and utilities are the largest sector, accounting for 32% and 21% of assets, respectively. The rest of the fund consists of companies in sectors such as basic materials, consumer cyclicals, and energy. Although there is the potential for capital gains distributions when the fund rebalances each year or deletes a company that skips a dividend, Barclays says it will use tax-loss harvesting to minimize or avoid distributions."

Editors Note: In addition to its magazine, Financial Advisor operates a Web site, which acts as a "match-making" system for individuals seeking financial advisors and other advice on financial planning, asset management, and estate planning. Check out www.FinancialAdvisorMatch.com.

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