Dividend stocks can provide you with a lot of recurring income over the long term. But they can also prove to be risky investments to hold on their own because if a company's financials deteriorate, it may need to cut or stop its dividend.
And if that happens, the stock could come crashing down, resulting in investors getting hit on multiple fronts: losing dividend income and seeing the value of their investment plummet as well.
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Picking a safe dividend stock with a good yield can be challenging. But another option is to just go with an exchange-traded fund (ETF). There are many ETFs investors can choose from, and there are plenty that focus on dividends.
One ETF that income investors might love is the Pacer Global Cash Cows Dividend ETF (NYSEMKT: GCOW). Here's why this fund might be a great fit for your portfolio.
GCOW total return level, data by YCharts.
This ETF yields 5%
One of the most attractive features of this ETF is that it yields around 5% right now, which is close to four times the S&P 500 average of 1.3%. For investors, that means an investment of roughly $20,000 in the Pacer fund would be enough to produce $1,000 in annual dividend income. If you were to go with an ETF that mirrors the S&P 500, you would need to invest around $77,000 to collect the same payout.
The fund focuses on investing in stocks that not only have high yields but also strong free cash flow, which can enable them to continue making payments for the foreseeable future. Many of its top holdings offer high payouts, including BP and Pfizer, which yield more than 6%.
Its broad diversification keeps risk low for investors
Some high-yielding ETFs are heavily dependent on a handful of dividend stocks whose payouts may be unsustainable. But that's not the case with the Pacer ETF.
Its portfolio is well diversified, as no single stock comes close to even making up 3% of its total weight. Its largest holding, BP, is just under 2.2%. And combined, its top 10 holdings represent just 21% of the portfolio's weight.
For investors who may be worried about the safety of any one particular dividend stock, that's some valuable diversification that can make holding this ETF an attractive option for the long term. The energy sector accounts for the largest slice of the ETF's overall holdings at 21%, followed by healthcare at 18%, consumer staples at 16%, and industrials at around 13%.
There are around 100 holdings in the fund, which gives investors some good diversification while still focusing on top dividend stocks.
The fund's expense ratio of 0.6% is modest compared with other funds. While there are lower-cost options available, I think with Pacer picking top dividend stocks and giving you a diverse portfolio and an excellent yield, the fee is certainly justifiable.
This ETF can be a solid investment to build your portfolio around
The Pacer Global Cash Cows Dividend ETF is an excellent option for dividend investors who want to keep their risk low while still collecting a high payout.
The fund has doubled in value over the past 10 years (when including its dividend payments), and while it may not have outperformed the S&P 500 over that stretch, investors who are after stability and dividend income may still see a lot of value in it. This can be a solid investment to put in your portfolio and forget about.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool recommends BP. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
