Defensive bets: A trio of dividend funds

"It's time to take some profits and play defense for a while," says Glenn Rogers, adding, "Fortunately, we can hedge our bets by taking some profits and building cash reserves and reinvesting in more defensive securities."

In The Internet Wealh Builder, the advisor reviews a trio of conservative exchange-traded funds focused on large cap dividend-paying stocks.

"Everybody I talk to these days is nervous, although for different reasons. Some are nervous because they feel left behind.

"They sat on the sidelines and missed the incredible rally we've had since March. Now they're afraid they won't have a chance to participate because the market has been refusing to correct.

"Others are nervous because they made a pot of money in the rebound and they're afraid they could lose it all in a replay of last year's meltdown.

"So they don't know whether to take profits, let their winnings run, or curl up in a fetal position and hope they'll be rescued by divine providence.

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"Meanwhile, there some relatively low-risk ETFs where you could park some money while we see how all this plays out. For example, take a look at these three funds, all of which are designed to track baskets of U.S. companies that offer respectable dividends.

"The three are the iShares Dow Jones Select Dividend Index (NYSE: DVY), the Vanguard Dividend Appreciation ETF (NYSE: VIG), and the Power Shares High Yield Dividend and Equity Achievers (NYSE: PEY).

"Although all three of these ETFs have the same general goal, it's somewhat surprising to find that their performance has varied greatly.

"At the time of writing, DVY was down 12% year-to-date, VIG was flat, and PEY was down almost 20%. So, interestingly, these issues have not participated in the market rally so far, which may be good news.

"Take a look at the holdings of these three baskets you'll notice some fairly dramatic differences. PEY is made up of the 50 highest yielding companies with at least 10 years of consecutive dividend increases.

"DVY is composed of companies that have provided relatively high dividend yields on a consistent basis over time while VIG looks a lot like the Dow Jones 30 Industrials to me.

"Currently, PEY has a trailing 12-month yield of 5.3%, based on Friday's closing price of $7.45. However, I should note that the monthly payments have dropped off significantly this year and I do not expect the yield to be that high over the next 12 months. 

"This ETF has the most diverse collection of holdings among the three, split between industrials, materials, utilities, telecommunications, and a few healthcare, media, and consumer goods stocks. About 40% of the fund is in the financial services sector.

"The portfolio emphasis is weighted heavily towards small to mid-cap companies, which explains why this fund fared worse than the other two in the market meltdown. However, it also appears to have more upside potential if the rally continues.

"DVY has 101 positions and is a mix of large, medium, and smaller companies. Some names in the portfolio are immediately recognizable such as Kimberly-Clark, Chevron, and Dow Chemical.

"Distributions are paid quarterly and the last two have been about 39c a share. The trailing 12-month payout totalled $1.79 which would translate into a yield of 4.4% based on Friday's closing price of $40.78.

"But based on the payouts for the last two quarters, I suggest it is more realistic to expect distributions in the $1.60 range over the next year for a projected yield of 3.9%.

"VIG is the most conservative play. It is designed to track the Dividend Achievers Select Index, which is administered exclusively for Vanguard by Mergent, Inc. There are 186 securities in the portfolio with a focus on large-cap stocks.

"Top holdings include Wells Fargo, IBM, Coca-Cola, PepsiCo, Wal-Mart, and Johnson & Johnson. As I said, it looks a lot like the Dow 30 Industrials, only bigger. It pays quarterly distributions which have recently been running at about 23c a unit.

"The trailing 12-month payout is 99.5c for a yield of 2.26% based on Friday's closing price of $43.99. My yield projection for the next year is around 2%."