In order to get a margin of safety and protect my capital from mistakes I decided I should invest in a portfolio of compaines and an effective way of achieving this was to buy ETFs instead.
The 'problem' with buying ETFs is that it can sometimes feel less satisfying. It dispenses with the need to analyse a list of stocks, purchase a select few ‘winners’ and become a joint shareholder in a company you believe in.
For some this is the whole point of investing (yes, admitedly it can also be fun) and buying an ETF is also effectively admitting that ones stocks selections are no better than the overall market, which for most people is probably true!
A list is of three interesting ETF’s EFV, DWX and VYM that I found are shown below with key valuations (EFA and SPY are shown for overall market comparisons).
EFV holds in its portfolio the cheaper half of the MSCI EAFE Index. It is composed of companies domiciled in developed Europe and Asia, for example Vodafone (UK), BP (UK), Total SA (France), Sanofi (Swizterland), Nestlé (Switzerland), Siemens (Germany), Banco Santander SA (Spain), Telefonica (Spain). Exactly the type of companies I want to buy!
With a nice overall dividend of 4.5%, valuations looking attractive and with the price near 3-years lows this is a buy to me. Plus with the diversification of the ETF, if it falls another 30% (early 2009 lows) I should have the confidence to stay invested and perhaps even buy a bit more.
DWX tracks the S&P International Dividend Opportunities Index which includes 100 tradable, exchange-listed common stocks from around the world that offer high dividend yields. The list of companies includes some familiar names such as France Telecom SA (France), Telephonic (Spain), Tele2 (Sweden), Aviva PLC (UK) and E.ON (Germany) resulting in a high dividend yield of 8.9%.
Again the valuations look attractive with the current price at a near 3-year low. At the risk of being enchanted by the high yield, the ETF does provide a diverse portfolio of dividend paying stocks from around the world at a price that is potentially depressed. I would rather spend my money buying this ETF than take the ‘extra risk’ with just the one or two separate stocks.
The holdings of Vanguards VYM are predominantly US large cap value stocks as it tracks the FTSE High Dividened Yield Index. The dividend yield is not actually that high at 3.4% and it purportedly only provides 1% more that the S&P 500, however, it is the stocks within its portfolio that attract me to this specific ETF.
Stocks include Exxon, Microsoft, AT&T, Procter & Gamble, Johnson & Johnson, Coca Cola, Wal-Mart Stores, Intel and McDonalds, exactly the sort of companies I want to buy shares in, put them in the back of the drawer and hold them forever!
What I can’t decide at the moment is whether they are good value for money. I suspect I am not the only one who would like to own these stocks in a world of low interest rates and achieving return of capital. I believe there are a lot of yield hunters in the US at the moment and they are all searching for low risk, large cap companies that provide a dividend for income.
In contrast to the previous two European biased ETFs the current price of VYM is close to three years highs and around 100% higher than the early March 2009 lows. The valuations are very similar to the S&P 500 index but I do wonder if this has been the case historically (i.e. is it relatively overvalued?).
I have yet to pull the trigger on this one and will wait for a better opportunity. The benefit of volatile markets is that they have a habit of offering cheaper prices e,g only back in November this ETF could have been purchased for nearly 20% cheaper than its current price.
One piece of data that speaks to get into dividened paying US stocks is that payout ratios of S&P 500 companies are at historically low levels link. If you believe there will be some kind of reversion to the mean then dividends are set to increase and reward investors with dividend collecting strategies.
Editors note: I am currently on holiday so blog activity will be a minimum for the next 2 weeks.
