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Three Ways To Capture Top Dividend Payers

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It's a long-held myth that to find the best dividend payers, you need to own the stocks directly.

With exchange-traded funds (ETFs), selection of the best dividend payers is done by managers.

As a result, you get a generous basket of the most consistent dividends available and don't have to buy the stocks individually.

Have you seen bond yields lately? Stock dividends have never been more important to income-oriented investors.

With the U.S. 10-year Treasury bond yielding under 2% lately, that means once you subtract inflation, you're breaking even and on the cusp of a negative real yield.

Across the world, bond yields are even worse. BMO Private Bank reports that in a dozen countries, government bonds carry negative yields. Switzerland is paying a negative 0.11% on its 10-year bond.

Since you're not going to do much better in CDs or money market funds, the natural alternative is stock dividends and ETFs may be the single-best way to hold top dividend stocks.

Unlike bonds, stocks offer the prospect of appreciation in addition to yield. Just keep in mind that they are much riskier than bonds and dividends and stock prices are not guaranteed.

Still, if you were looking for yield, how would you easily find the best dividend payers?

I would look no further than three ETFs ,which hold baskets of the top dividend-paying stocks in mostly passive portfolios. With these vehicles, you don't have to chase around individual stocks.

Here are three dividend ETFs to consider:

iShares Select Dividend (DVY)

Consistently rated as one of the highest-dividend yielding ETFs, the fund focuses on medium-sized companies that often fly under the radar.

The fund is yielding just above 3% and gained nearly 15% last year, beating the S&P 500 index by about a percentage point. It charges 0.39% for annual management expenses.

Vanguard Dividend Appreciation ETF (VIG)

This huge dividend fund primarily invests in large companies that pay consistent dividends. It's currently yielding just north of 2%.

It was up 10% last year, but only charges 0.10% annually for expenses. I hold it in my 401(k).

SPDR Global Dividend ETF (WDIV)

Want to cast a wider net for dividend yields? This fund tracks dividend payers from across the globe.

Currently yielding just under 4%, it was up 4 percent last year and charges 0.40% annually for expenses.

Caution Advised

If you're seeking to add dividend growth to your portfolio, keep in mind that these are stocks, not bonds.

Although dividend-payers tend to be less volatile than non-dividend payers, they can still decline in value. If there's a market downturn or interest rates rise, share values of these stocks will dip.

Here's another cautionary note: With bond yields down for the past six years, high-yielding stocks may be vulnerable to a sell-off. Here's BlackRock's Russ Koesterich, their chief investment strategist, from his investment commentary:

"The problem is that after a relentless search for yield, investors have piled into dividend-yielding stocks, or what we call "bond market proxies." As a result, many such segments of the market are extremely expensive."

Dividend-rich stocks should be seen as additions to your stock portfolio and not a substitute for bonds.

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