There are two primary ways to make money on Wall Street.
The first is to find an exploitable, short-term edge and just keep hammering it until it stops working. Successful day-traders and those trying out the current high-frequency trading fad are prime examples of people exploiting the short-term edge. No question, this method works, but it can be difficult to find an edge and it generally requires full-time, hands-on effort to make it work. Some investors enjoy the search for these edges and are well rewarded when successful. The downside to short-term trading is that it's high-risk and, frankly, many investors lose and lose big in the pursuit of short-term profits.
The other, safer way to make money on Wall Street is the slow and steady method. This philosophy takes advantage of the long-term upward drift in stock prices, as well as the power of dividends and compounding gains.
[Amy Calistri's Daily Paycheck newsletter is a prime example of this approach. In her real-money portfolio, she finds attractive dividend stocks and harnesses the power of compounding to earn a monthly paycheck in excess of $1,300.]
While it lacks the excitement of short-term edge trading, it's safer and takes less overall effort. In other words, it's more of a hands-off, let the market do the work method. All one needs to do is locate the right dividend-paying stocks, make consistent and steady investments, allow time for the dividend reinvestments to compound and before you know it, your nest egg will expand considerably.
Obviously, it's not always that simple. There are risks to any strategy. One of the prime difficulties of the slow and steady method is picking the right dividend-paying stocks you can rely on for the long term.
Fortunately, much of this stock-picking dilemma has been eliminated with the advent of dividend-focused exchange-traded funds, or ETFs for short. A dividend-focused ETF is an investing instrument that mirrors a group or index of dividend-paying stocks. These instruments eliminate the need for you to drill down into individual companies, thus mitigating single-company risk. In other words, dividend-focused ETFs provide automatic, professional diversification across a sector or index.
So where can one find these dividend-paying ETFs? Here are three of my favorites:
1. SPDR S&P Dividend ETF (NYSE: SDY)
This dividend-paying dynamo tracks the S&P 500 High-Yield Dividend Aristocrat Index. What a great name, but does the index live up to its highfaluting name? Well, it's made up of 60 companies from the S&P 500 that have increased their dividends yearly for a minimum of 25 years. The majority of the underlying companies are large-cap firms that still trade at realistic prices.
The ETF yields a little less than 4%, not a bad return for a fairly stable investment, though it doesn't quite live up to its upper-crust name. It does, however, boost about a 6% return for the year and has returned a steady 18% over the last three years.
2. Guggenheim Multi Asset Income ETF (NYSE: CVY)
I love this one for its massive diversification. This ETF tracks 120 underlying instruments, including common and preferred stocks, REITs (real estate investment trusts), MLPs (master limited partnerships), ADRs (American Depository Receipts) and closed-end funds.
A whopping 38% of the ETF is made up of utilities and financial companies. It has a year-to-date return of about 8% and a current yield of 5%. If you don't mind the fund's large weighting in utilities and financial companies, this may be the right dividend ETF for you.
3. iShares S&P U.S. Preferred Stock Index Fund (NYSE: PFF)
This ETF, as its name suggests, tracks 220 preferred stocks from 44 U.S. companies. It's not diversified across sectors, though, as about 90% of the holdings are in preferred stocks of various financial companies. Your opinion of the financial sector should be the deciding factor on whether to invest in this dividend ETF.
It is also important to note that preferred stocks generally tend to behave more like bonds than common stocks in relation to interest rates. With rates at rock-bottom levels, this should be a consideration before investing in PFF. With that said, PFF has the best performance and yield of the three I've covered today, with a yield of 6% and a 10% gain so far on the year.
Risks to Consider: ETFs eliminate the risk of being exposed to single stocks, however, this does not mean they are risk-free. Utilize the same due diligence when buying ETFs as when you make any investment.
Action to Take –> The three ETFs I mention in this article, as well as others in the space, can provide ample diversification and produce reliable dividends within your portfolio. Because of that, it makes more sense for most investors to use these funds to form the core of their portfolio and generate income rather than to pick individual stocks in uncertain times.
– Dave Goodboy
This article originally appeared on StreetAuthority
Author: Dave Goodboy
When Reliable Stocks are Hard to Find, This is my Favorite Option for Steady Income