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I’m an income investor who prefers to construct investment portfolios with individual securities. Fortunately, I have the time and ability to analyze and cobble together individual securities to create high-yield, diversified income portfolios. After all, it is my occupation.
Other investors are more time constrained, or they lack the wherewithal, or perhaps even the confidence, to undertake individual security analysis. For these investors, exchange-traded funds (ETFs) are useful alternatives. Well-diversified income portfolios are possible with just a few ETFs, if you know which to choose.
The following four dividend ETFs are solid choices for any income investor. They’re low-volatility, low cost, and high yield. With these four ETFs, an investor can produce a well-diversified income portfolio.
A fund of large-cap dividend growers is a solid anchor. I like the iShares High Dividend ETF (NYSE: HDV). This ETF gives investors immediate exposure to the largest dividend-growth companies: Chevron (NYSE: CHV), AT&T (NYSE: T), Johnson & Johnson (NYSE: JNJ), and many more. The HDV is a true dividend-growth investment. Over the past two-and-a-half years, the quarterly dividend has more than doubled to $0.58 a share from $0.24. The rising payout has helped lift the fund’s yield to a respectable 3.2%.
Incorporating international exposure is generally a good idea. Foreign stocks tend to be imperfectly correlated with U.S. stocks, so they provide a diversification benefit. I prefer to keep it safe and invest in large international income stocks in developed markets.
The SPDR S&P International Dividend ETF (NYSE: DWX) fits the bill. This international fund owns over 100 of the highest-yield stocks in Western Europe, Australia, the United Kingdom, and Canada. The companies are large- or mid-cap and weighted by yield, which produces an overall fund yield of 6.9%. With the DWX, investors get high-yield and international exposure. What’s more, they get it at a reasonable price: the DWX trades at only 13 times current earnings.
I’m also a fan of real estate exposure. In the REIT ETF space, I like the Vanguard REIT ETF (NYSE: VNQ). The fund invests in a wide swath of REIT securities – storage, healthcare, residential, and commercial properties. The VNQ offers instant REIT diversification, and a high yield. At 4.2%, the yield on the VNQ fund is higher than many individual REIT stocks.
Bonds have historically been a key component of income portfolios. Unfortunately, bonds of any quality have been lousy income investments in recent years. Short-term investment-grade bonds yield 2% to 3%. A few longer-term investment-grade bonds push the yield up to 4%.
Income investors can do better with a preferred-stock ETF. Preferred stocks have characteristics of both stocks and bonds. They are like common stocks because they pay dividends. They are like bonds because they are issued with a coupon payment based on par value and a contractual obligation.
Income is the real attraction, though, which is why I like the iShares U.S. Preferred Stock ETF (NYSE: PFF). The fund generates a 6.5% yield by investing in over 300 preferred stocks issued by large- and mid-cap companies. The PFF gives income investors the best of both worlds: the high-yield of a dividend stock and the safety of a bond’s contractual obligation to pay.
With these four dividend ETFs, an income investor can construct his or her own high-yield dividend-income portfolio.
Organize Your Dividends With One Step
Do you know when your next dividend stock pays out? Do you know when the dividend stock you want to buy more of pays out – and how much? We’ve put together a simple calendar that highlights many of the market’s best dividends into one easy to scan document. Read it once, and you’ll see how to set up a 12 month dividend stream to ensure income all year long. Click here to see the full details of the Dividend Calendar!