Safer Than a Dividend Stock? A Dividend ETF

Stocks with a strong dividend history have become so desirable in investing that even Bill Gross, the “Bond King” head of PIMCO, is recommending�equities such as Procter & Gamble (NYSE:PG) and The Southern Co. (NYSE:SO) for the income feature. For investors, traders and speculators seeking to profit from the income element of an equity, the SPDR S&P Dividend (NYSE:SDY) exchange-traded fund offers significant advantages over a single stock.

The SPDR S&P Dividend ETF�tracks the S&P High Yield Dividend Aristocrats Index, comprised of the 50 highest-yielding dividend stocks that have increased payouts in each of the past 25 years. This includes companies of all sizes, as the emphasis on yield allows for many small-cap stocks to be included in the ETF. With more than $8 billion in assets, the SDY�yields 3.2% and provided total returns of 9.8% in 2011.

Exchange-traded funds are ideal vehicles for speculators, traders and investors alike. Like a stock, an ETF has movement and pricing patterns. By the very nature of an ETF, the volatility is lower than the market as a whole — the SDY has a beta of 0.87 — but while not as volatile as the average stock, it does fluctuate. For the past 52 weeks, SDY’s price range has been $44.90 to $54.83. Speculators can buy and sell for profits based on mean reversion trading.

The dividend feature allows for capture-the-dividend trading. This can be very profitable and exposes an investor’s capital for only four very short periods a year when the security goes ex-dividend, as detailed in a previous article. Capture-the-dividend trading allows for the individual to have the “perfect trading day,” with all positions closed when the bell rings.

For investors, the price movements of the SDY�should be monitored to buy at the most desirable level. If a certain income yield is the target, then patiently wait for the dips. At the low for the past 52 weeks, SDY’s dividend yield would have been around 4%. The average yield for an S&P 500 is around 2%. And the investor would enjoy not only twice the return of the S&P average, but greater diversity than owning just a single stock — and at a much lower cost than trying to buy and sell 50 different equities to replicate SDY’s holdings.

As of this writing, Jonathan Yates did not hold a position in any of the aforementioned securities.