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Not all yields are created equal. The attractiveness of high yield investments are hard to ignore, but anything with a high yield must always be viewed with caution. In some cases, dividends have soared as companies realize investors were pushed further out on the risk curve by quantitative easing. In other cases, a company’s share price may have fallen so low that a high yield looks great but will end up being cut.
That’s why I love ETFs. They are so diversified that you aren’t beholden’ to a single stock running into trouble. While there can be risk with ETFs that are too narrowly focused on a sector, you can choose the right ETFs that historically do well over the long term.
Here are what I consider the three safest high-yield ETFs.
iShares Global Telecom (NYSE:IXP) is a great choice for many reasons. It doesn’t fool around with little stocks that nobody has heard of. It has cobbled together a 32-stock basket of the biggest and best telecom companies in the world. The big telecom names of virtually developed nation are in here, including AT&T (NYSE:T), China Mobile Hong Kong, Telefonica SA, and Deutsche Telekom AG. Many countries have limited carriers or maybe just one run by the government, meaning the chances of folding are very low.
Telecom companies also have a habit of generating enormous free cash flow once they become mature, and they pay a lot of that back to shareholders as a generous dividend. That’s why you see income investors holding telecom stocks. They are reliable and safe, and have so much free cash flow that business could get clobbered and they’ll just keep on trucking. They don’t tend to generate big capital gains, but you’re in it for the dividend which, in this case, is a delightful 12.32%.
The other sector that pumps out free cash flow and dividends are financials. The PowerShares KBW High Dividend Yield Financial ETF (NYSE:KBWD) yields 8.33%. This ETF is a bit too heavily invested in Business Development Companies and Mortgage REITs than I’d like, but there’s enough diversity in its 38 holdings for me to reasonably comfortable with it. There’s plenty of banking, insurance, and financial services in there for me to be OK with the allocation.
For the portion that is represented by BDCs and REITs, which carry interest rate risk, current concerns are limited by the historically low rate environment. The stocks are also not ones to move too much themselves, but if you want that high yield, that’s why you are in this ETF.
Just keep an eye on interest rates. If they start to rise, you’ll want to jump out of this ETF and into another.
The most intriguing play of all, however, is PowerShares CEF Income Composite ETF (NYSE:PCEF). I regard this as an ETF of ETFs, as it is an ETF composed of a collection of closed-end funds, which are themselves diversified entities. A closed-end fund raises money via a one-time IPO, and invests the proceeds in whatever specialized portfolio of securities it was formed to invest in. In this case, PCEF invests in a wide variety of income-generating closed-end funds that run the spectrum from equities to all forms of credit.
I really like the diversification here. It’s only 22% invested in stocks and 61% in bonds. It’s a great way to get exposure to more specialized debt instruments you otherwise would never be able to get close to. The PCEF yields 8%.
Retire on Just These Three Stocks
Ian Wyatt has found 3 stocks that pay dividends so big — you can retire on them. The Wall Street Journal calls them, “mega-dividends.” These stocks have a history of consistently RAISING their dividends… quarter after quarter. In fact, one of these cash-cranking companies hiked its dividend 10-fold! So, if these ever-increasing payouts sound good to you… Click here for all the details.