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Despite a host of concerns, 2013 was a great year for stock investors. The S&P 500 rose more than 31% and several small cap benchmarks easily crushed this solid performance as well.

However, while by and large it was a great year for stocks, one segment was clearly hurting for much of the year; income. This is because, as QE taper talk intensified, U.S. treasury rates began to surge, nearly doubling over the course of 2013.

This sharp increase in rates for benchmark debt cascaded down to riskier assets, leading to big concerns for a variety of market segments, such as utilities, REITs, and other rate sensitive corners of the market. Yet while this impacted a number of dividend sectors, several corners survived relatively unscathed and even surged higher on the year, despite the unfavorable market environment.

Best Income ETFs of 2013

Below, we discuss three of these best performing dividend ETFs of 2013. All three have beaten out the S&P 500 for the year, which is no small feat, and they have dividend yields in excess of this key American benchmark to boot (also see 4 Best New ETFs of 2013).

These top performers could be the way to go for 2014 as well, especially if tapering remains the focus and the trends in the income market continue, suggesting any of the following dividend funds may be top selections for those seeking a dividend play this year:  

FlexShares Quality Dividend Dynamic Index Fund (QDYN - Free Report)

This relatively new ETF from Northern Trust looks to provide investors with long term growth potential, while at the same time giving solid dividend payments. The fund also has a ‘quality’ factor, seeking to find the highest quality stocks for its nearly 200 security portfolio.

Currently, the portfolio is a bit concentrated in financials (20.7%), tech (16%), and energy (11.3%), though no single security makes up more than 4% of the assets. The fund is also relatively cheap, coming in at 0.37% in expenses a year (see FlexShares Debuts 3 Dividend ETFs).

The fund has been an all-star performer during 2013, adding just over 36.9%, easily beating out the S&P 500 over the same time frame (and holding a somewhat similar basket of large cap stocks too). Plus, the fund has a 2.7% 30 Day SEC Yield, once again beating out the S&P 500 and its roughly 1.8% payout.

ALPS Sector Dividend Dogs ETF (SDOG - Free Report)

This often-overlooked fund takes the ‘Dogs of the Dow’ approach, and uses it on a sector-by-sector basis. The theory says that these higher yielding stocks will appreciate in order to bring their yields in line with the market, potentially leading to outsized gains.

The fund accomplishes this by taking the five highest yielding securities, in each of the 10 GICS sectors, and putting roughly 2% into each. SDOG uses a quarterly rebalancing, but an annual reconstruction, allowing the stocks to play out over the full year (see all the Large Cap ETFs here).

This approach looks to give the fund a focus on yield in the large cap market, while giving investors roughly equal exposure to all of the market’s sectors. SDOG has been a winner with this approach in 2013, adding more than 34% on the year, and paying out 3.4% over the course of 2013.

WisdomTree Europe Smallcap Dividend ETF (DFE - Free Report)

Europe had a great year, with many stocks surging in the time frame. This was especially true in the small cap space, as these securities led the way for Europe’s 2013 resurgence (read Play a Resurgent Europe with These ETFs).

A great way to play this is with DFE, a fund from WisdomTree that tracks the WisdomTree Europe SmallCap Dividend Index. This benchmark focuses only on dividend paying companies in Europe, weighting stocks by cash dividends paid.

The index contains about 300 stocks in its basket, giving heavy weights to the industrials, financials, and consumer discretionary market. In terms of countries, this fund focuses on the UK (25%), Sweden (14%), and Italy (12%) for its exposure.

The product is in-line from an expense perspective, charging investors 58 basis points a year in fees. While the payout on this product is good—nearly 3% using a 30-Day SEC yield metric—the real selling point here is the performance, as the fund added an impressive 43% on the year.

Bottom Line

While 2013 might not have been a great year for income investors, there were a few funds that have managed to hold their own in the time period. These have proven to be resilient products during this tumultuous time frame, and could be interesting selections for 2014 as well (see all the top Ranked ETFs here).

So if you are looking for an income ETF that may be able to outperform, even when events are against higher payouts, consider any of the aforementioned ETFs. They clearly can surge higher, while they still look to provide investors with solid payouts, no matter what happens in terms of capital appreciation during 2014.

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