Low-cost, high-dividend exchange-traded funds (ETFs), such as the SPDR S&P Dividend ETF (SDY), can help investors find extra income from dividend payments without the risk of having to choose among individual dividend-paying stocks
While individual companies can often pay much more tempting yields than an ETF, with some offering dividend yields of between 5-10%, no company and no stock is immune to market volatility. It is a lot riskier to “put all your eggs in one basket” than to spread out risk through a dividend-paying ETF, which can hold several hundred companies in its portfolio that all pay dividends.
Simply put, investors who receive dividend payments from multiple companies via an ETF will be only marginally affected when one or even several companies stumble, decrease in share price and potentially fail to deliver on dividend obligations. This fact can make dividend ETFs very attractive to risk-averse investors.
Of course, the major concern facing any dividend-paying stock or ETF is a company cutting or omitting its dividend payment, a real threat in uncertain economic and financial times. While a dividend ETF is less affected by this risk, it is not immune to this problem, especially as these funds offer reduced yields. According to Seeking Alpha, 39 companies announced dividend cuts in July and August 2017 alone, and another 21 omitted a payment.