Morningstar Advisor - February/March 2009 - (Page 60) Screens Find Succor in These Large Dividends By John Gabriel and Bradley Kay Use this screen to find high-yielding ETFs that will weather the crisis. Financial markets around the globe are fluctuating violently because of greed and fear— with fear overshadowing occasional glimpses of optimism over the past few months. Amid the unprecedented levels of volatility we are experiencing in the market today, it’s no surprise that many investors are clamoring for some sort of stability, or a financial “safety net,” if you will. To that end, we decided to screen our ETF database in search of the highestyielding funds. If we are facing a period during which investors should expect lower returns because of the deleveraging process that our financial system is undergoing and the looming threat of a global slowdown, then sustainable dividend payments could be an excellent way to ensure that we’re capturing our fair share of the market’s returns. The first thing we are looking for is the yield itself. When asked about his outlook for expected returns on Berkshire Hathaway’s stock portfolio, Warren Buffett promptly replied, “We would be very happy if we earned 10%, pretax.” Co-chairman Charlie Munger added, “You can take what Warren said to the bank. We are very happy at making money at a rate in the future that’s much less than the past and I suggest that you adopt the same attitude.” Given that attitude among some of the most successful investors today, we would be happy to lock in nearly half that return straight away through dividends, so we start by screening for ETFs with 12-month yields of 4% or higher. Next, we want to make sure these large payouts keep coming in the future and, we hope, grow over time. The goal is to sidestep those ETFs that, on the surface, appear to offer some very handsome yields but could see dividend payments slashed in lieu of raising or preserving capital in an attempt to survive the ongoing credit crunch. As banks and REITs face the credit crunch, we expect the fat yields on most financial-services stocks to disappear. So, to ensure that our ETFs provide sustainable dividends, we screen out those that have a greater than 15% stake in financials. And % Financial Services ETF 4 It also helps to see if the market believes that the dividends paid by the companies inside these ETFs will remain sustainable. Because 60 Morningstar Advisor February/March 2009
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