Building a
Dividend &
Income Portfolio
with ETFs
Houston Investor’s Association
January 19, 2013
Ron Rowland
President, Capital Cities Asset Management
Investment Management Services
Editor, AllStarInvestor.com
Publisher of subscription newsletters
Founder, InvestWithAnEdge.com
ETF analysis and market commentary
Content widely syndicated to:
SeekingAlpha, TheStreet.com, & others
Accumulation  Distribution
Instead of optimizing for growth, the need
for a reliable and growing income stream
often becomes the priority.
Building a portfolio having these attributes is
now feasible using ETFs.
However, with more than 200 dividend and
income ETFs, you must exercise care when
building a sound diversified portfolio that
meets your objectives.
3 Reasons To Be Here
1. Understand the risks of the 4
primary approaches to living
off your portfolio
2. Learn about the hidden risks
of dividend investing
3. Improve your confidence in
selecting dividend ETFs
3 Things You Will Learn
1. The 12+ categories of dividend
& income ETFs
2. Why you have to look at more
than yield data
3. Putting it all together - your
portfolio
Living Off Your Portfolio
1: Put in bank and live off the interest
Not bad when banks paid 8% interest
Might appear to be the safest, but the current low
interest rate environment dooms this to failure.
FDIC limitations, bank CDs paying less than 1%.
Even if you stretch this definition to include 30-year
Treasury bonds, you would be locking in just 2.7%
per year for the next 30-years. Adjusted for taxes,
leaves you with very little, and adjusted for inflation
quickly puts you in the hole.
Living Off Your Portfolio
2: Immediate Annuity
Approach that most resembles a pension plan. You
hand over your nest egg (lose control of funds) to
an insurance company and they agree to pay you a
fixed amount for as long as you live.
Payments may sound attractive at first – 7.0% to
7.5% for life for a 65-year old person or 6.0% to
6.5% for a 65-year old couple, but those rates have
no inflation adjustment, heirs get nothing, and the
insurance company needs to live as long as you do
(based on 12/31/11 prevailing rates).
Living Off Your Portfolio
3: Total Return Portfolio
Traditional approach typically based on 60% stock
/ 40% bond portfolio. Requires partial position
liquidations and annual rebalancing.
Can be used in conjunction with 4% Rule (assumes
your first year 4% withdrawal will grow each year
to offset inflation).
Research shows there is a small chance you could
outlive your portfolio if the next 20-30 years turn
out to be a worse-case market return scenario.
Living Off Your Portfolio
4: Dividend Growth Portfolio
Proponents argue annual withdrawals should
consist only of the dividends and interest without
the need to ever sell anything. Assumes the growth
of the dividends will offset the effects of inflation.
A risk with this approach is that companies with
steady dividend growth don’t yield the initial 4%
needed in the first year.
Higher yielding investments can reduce their
dividends in tough economic times.
Why You Have To Look At
More Than Just Yield
iShares DJ Select Dividend ETF (DVY)
2007 Yield = 3.3%
2008 Yield = 3.7%
2009 Yield = 4.0%
2010 Yield = 3.9%
“Dividend ETFs maintained their yield
throughout the financial crisis.”
Why You Have To Look At
More Than Just Current Yield
“Dividend ETFs maintained their yield
throughout the financial crisis.”
Very deceiving. Current yield matters
only to someone buying that day.
Actual payouts to owners dropped
significantly, about the same as
prices, producing steady appearing
yields.
What Really Happened to
Dividend Funds
Ticker Name
Current
Yield
2008
Div
Pmts
2009
Div
Pmts
2010
Div
Pmts
% Chg
20082009
% Chg
20082010
DVY
iShares Dow Jones Select Div
3.5%
$2.42
$1.66
$1.70
-31.4%
-29.8%
VIG
Vanguard Dividend Appreciation
2.1%
$1.03
$0.98
$1.05
-4.9%
1.9%
SDY
SPDR S&P Dividends
3.2%
$2.21
$1.73
$1.74
-21.7%
-21.3%
VYM
Vanguard High Dividend Yield
2.9%
$1.44
$1.17
$1.09
-18.8%
-24.3%
IDV
iShares DJ Intl Select Div
5.4%
$2.82
$1.06
$1.32
-62.4%
-53.2%
DWX SPDR S&P International Div
7.6%
$4.64
$1.89
$2.36
-59.3%
-49.1%
PID
PowerShares Intl Div Achievers
3.5%
$0.72
$0.47
$0.42
-34.7%
-41.7%
PFM
PowerShares Div Achievers
2.2%
$0.36
$0.30
$0.28
-16.7%
-22.2%
DTD
WisdomTree Total Dividend
2.7%
$1.64
$1.14
$1.34
-30.5%
-18.3%
FGD
First Trust DJ Global Select Div
5.3%
$1.40
$0.69
$1.00
-50.7%
-28.6%
Current yield data from ETF Field Guide (6/30/12)
Annual dividend payments from Morningstar (12/31/11)
Why You Have To Look At
More Than “Current” Yield
iShares DJ Select Dividend ETF (DVY)
Current
Year Yield
2008 3.7%
2009 4.0%
2010 3.9%
2011 3.8%
Payout Yield on Cost*
$2.42
3.7%
$1.66
2.6%
$1.70
2.6%
$1.91
3.0%
* Assumes investment 12/31/07 at $64.49
Flavors of Dividend & Income ETFs
Core Dividend Funds
iShares DJ Select Dividend (DVY)
SPDR S&P Dividend (SDY)
Dividend Growth
Vanguard Dividend Appreciation (VIG)
High Yield Equity
Vanguard High Dividend Yield (VYM)
iShares High Dividend Equity (HDV)
Targeted Cap Dividend
WisdomTree Small Cap Dividend (DES)
WisdomTree Mid Cap Dividend (DON)
Flavors of Dividend & Income ETFs
Strategies with Dividends
PowerShares S&P 500 Low Volatility (SPLV)
Foreign Dividend
PowerShares International Div Achievers (PID)
iShares DJ International Select Dividend (IDV)
Emerging Market Dividend
WisdomTree Emg Mkts Equity Income (DEM)
EGShares Emg Mkts High Div Low Vltly (HILO)
REITs
iShares DJ US Real Estate (IYR)
SPDR DJ International Real Estate (RWX)
SPDR DJ Global Real Estate (RWO)
Flavors of Dividend & Income ETFs
MLPs
JPMorgan Alerian MLP Index ETN (AMJ)
ETRACS Alerian Infrastructure ETN (MLPI)
Commodity Exposure Dividends
Market Vectors Junior Gold Miners (GDXJ)
Guggenheim ABC High Dividend ETF (ABCS)
Utilities Sector
Vanguard Utilities (VPU)
iShares MSCI ACWI ex-US Utilities (AXUT)
Telecommunications Sector
Vanguard Telecommunications (VOX)
iShares MSCI ACWI ex-US Telecom (AXTE)
Flavors of Dividend & Income ETFs
BDCs – Business Development Cos.
PowerShares Global Listed Private Equity (PSP)
ETRACS Wells Fargo BDC ETN (BDCS)
Preferreds
SPDR Wells Fargo Preferred Stock (PSK)
iShares S&P US Preferred Stock (PFF)
Global X Canada Preferred (CNPF)
Convertible Bonds
PowerShares Convertible Securities (CVRT)
SPDR Barclays Convertible Securities (CWB)
ETF of Closed End Dividend Funds
PowerShares CEF Income Composite (PCEF)
Flavors of Dividend & Income ETFs
High Yield (“Junk”) Bonds
iShares iBoxx $ High Yield Corp (HYG)
SPDR Barclays High Yield Bond (JNK)
PowerShares Fundamental High Yld Crp (PHB)
Guggenheim BulletShares 2014 HY Bond (BSJE)
Investment Grade Bond
iShares iBoxx $ Investment Grade Corp (LQD)
PowerShares Build America Bonds (BAB)
SPDR Barclays Issuer Scored Corp Bond (CBND)
Guggenheim BulletShares 2014 Corp Bd (BSCE)
International Bonds
SPDR Barclays International Treasury (BWX)
SPDR Barclays International Corp Bnd (IBND)
Flavors of Dividend & Income ETFs
Emerging Markets Bonds
iShares JPMorgan USD Emg Mkt Bonds (EMB)
Market Vectors Emg Mkt Local Curr Bd (EMLC)
WisdomTree Emg Mkt Corp Bond (EMCB)
Muni Bonds
iShares S&P National AMT-Free Muni (MUB)
iShares 2014 S&P AMT-Free Muni (MUAC)
High Yield Muni
Market Vectors High-Yield Municipal (HYD)
ETF of Closed End Muni Funds
Market Vectors CEF Municipal Income (XMPT)
Other Dividend ETF Risks
Sector Concentration (as of 12/31/12)
DVY
VIG
FDL
PID
HDV
PFF
31% in Utilities
27% in Consumer Staples
30% in Utilities
21% in Telecom
21% in Health Care
100% in Financial Services
Improving Your Confidence
When Selecting Dividend ETFs
You have to look at more than yield
Look at historical annual payouts
You have to look at more than names
Look at sector weightings
Maintain awareness of other risks
Dividend Indexes have survivor bias
Look at price volatility
Don’t “lock-in” low interest rates
Portfolio Approach
Higher Yield & Lower Risk
Comparison
Yield Std Dev MDD
ETF Dividend & Income Model
3.9%
8.2%
-6.2%
iShares Dow Jones Select Dividend (DVY)
3.7%
10.2%
-7.0%
Vanguard Dividend Appreciation (VIG)
2.4%
11.5%
-7.6%
SPDR S&P Dividend ETF (SDY)
3.3%
11.2%
-6.6%
Vanguard High Dividend Yield ETF (VYM)
3.2%
10.9%
-7.2%
SPDR S&P 500 (SPY)
2.2%
12.8%
-9.7%
Yield = 12-month trailing yield, supplied by Morningstar as of 12/31/12.
Std Dev = annualized standard deviation of daily returns for 2012.
MDD = Maximum drawdown during calendar year 2012.
Std Dev and MDD data calculated in AmiBroker using FastTrack data.
Analysis of
ETF Dividend &
Income Model
All Star
Investor
Morningstar
12/31/12 Data
Composition
Style Box Analysis
Regional
Exposure
Sector Analysis
Key Portfolio Components
Vanguard Dividend Appreciation (VIG)
Largest holding at 15%, yield only 2.2%
PowerShares S&P 500 Low Volatility (SPLV)
Non-dividend fund with 3.5% yield
WisdomTree Emg Mkts Equity Inc (DEM)
Long-term growth + 4% yield
JPMorgan Alerian MLP ETN (AMJ)
Energy sector exposure with ~6% yield
PowerShares CEF Income Composite (PCEF)
Buys at discount, sells at prem, 7% yield
Guggenheim BulletShares HY 2013,14,15,16
Reduced risk junk ladder – fresh funds
Portfolio Customization Concepts
4% Rule is only a starting point
You may require more or less
Equity portion is 66% US & 33% foreign
These ratios can be adjusted
Conservative Sector Exposure
Convertibles can increase Tech exposure
Tax-sensitive Variation
Substitute target maturity muni ETFs
Current Income vs Income Growth
Adjust to meet your specific needs
Portfolio Plans For 2013
Put Accumulated Cash to Work
Leading candidates:
FT Technology Dividend (TDIV)
ALPS Sector Dogs (SDOG)
WisdomTree Small Cap Div (DES)
Roll 2013 HY BulletShares to 2017
Sooner rather than later
Monitor Current Positions
Performance, sector+geographic exposure
Rebalance
If required and if economical
3 Levels of Service
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ETF Deathwatch ETF Monthly Stats ETF reviews
Online content at InvestWithAnEdge.com
2) Subscription: AllStarInvestor.com newsletter
ETF Dividend & Income
ETF Strategic Allocation
ETF Tactical Growth
ETF Sector Rotation
Extensive Rankings
3) Investment Management
Personal account management via
Registered Investment Advisor affiliate:
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Disclosures
Past performance is not a guarantee of future results. All investments involve risk
and there is always the possibility of incurring a loss as well as the potential for
profits.
Ron Rowland, along with clients and employees of CCAM, utilize the strategies
presented here and will typically hold positions in any securities recommended.
Performance data for Capital Cities Asset Management (CCAM) examples are based
on the composite of all accounts under management that were in the referenced
investment program for the entire quarter and includes reinvestment of all dividends
and distributions. Reduction due to management fees has been accounted for. The
performance of individual accounts will vary from the composites presented.
Performance results for All Star Investor are not representative of those achieved by
clients of CCAM due to differences in security selection, timing of trades, transaction
fees, and CCAM’s management fees.
It should not be assumed that investments made in the future will be profitable or
will equal the performance of the securities mentioned or that the mentioned
investments were or will be profitable. The securities discussed do not reflect all
recommendations in this investment category, but a complete list of
recommendations for the past year will be provided upon request.