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High Yields for the Long-Term
by Steven Goldberg

Buying high-yielding stocks -- so long as they're not paying out too high a percentage of their profits in dividends -- has long been a winning strategy.

That makes iShares Dow Jones Select Dividend Index (DVY) an attractive exchange-traded fund -- but only, as we'll see, for truly patient investors.

Picking the portfolio

Barclay's Global Investors runs the ETF, but Dow Jones created the customized index. It starts by screening for the stocks with the highest yields. Then it excludes stocks that haven't had five straight years of rising dividends.

What's more, it insists on financially healthy stocks, those that pay out no more than 60% of their earnings in dividends. Finally, it picks only liquid stocks, those with daily average trading volumes of at least 1.5 million shares.

The end result is 50 high-yielding stocks. Dow rebalances the index annually.

The Barclay's ETF boasts low expenses, just 0.4% annually. It makes a fine vehicle for investors looking for dividend-paying stocks. The ETF yields 3.5%. And, of course, dividends are taxed at no more than 15%.

According to Morningstar, the ETF gives you a decent cross-section of large, mid-size and small-cap stocks. Almost 45% of the portfolio is in mid-caps.

Not surprisingly, the portfolio is heavily tilted toward value stocks.

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But there is a problem -- at least for short-term investors. The ETF currently has 44% of assets in financial stocks and another 22% in utilities. The huge weighting in both sectors means that the ETF may well suffer when long-term interest rates rise -- as I still fully expect them to do.

Moreover, it means there's no way you can think of the ETF as a proxy for the entire stock market. It has no tech or media stocks and virtually no health care stocks.

The largest holdings are Bank of America (BAC), FPL Group (FPL), Altria (MO), People's Bank (PBCT) and Comerica (CMA).

The bottom line: There's nothing wrong with this ETF for some of your long-term value money. But don't expect it to soar anytime soon.