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ETFs are perhaps the greatest gifts to investors since the advent of the mutual fund. With a few simple clicks, you can buy and sell entire baskets of stocks, offering you instant diversification both within the ETF itself and your portfolio.
For income investors, this is a godsend. Instead of slogging through mutual funds and their associated inconvenience, you can whip through a list of available dividend-focused ETFs to find the one that suits you.
It has created a lot of innovation, allowing managers to create high-yielding products that carry more safety and less risk than might have otherwise been achieved. Here are three such high-yield dividend ETFs. All pay more than 6%, and all focus on special sectors for safety.
First Trust Multi-Asset Diversified Income ETF (NYSE: MDIV) divides its investments into five categories of 20% each: stocks, REITs, preferred socks, MLPs, and junk bonds. It holds about $1 billion in assets, with a median market cap of $3.72 billion and P/E ratio of only 14.5.
What’s interesting is the ETF’s largest holding, at 20%, is another of its products, the First Trust Tactical High-Yield ETF (NYSE: HYLS). This focuses on high-yield corporate debt, also known as junk bonds, but the companies aren’t junk at all. These are well-known companies like Charter Communications (NASDAQ: CHTR). It also includes a short position in U.S. Treasurys. So in addition to the high yield, it is also looking for capital appreciation.
While the ETF itself is up 8% since inception vs. the S&P 500’s 17.7%, you are collecting a 7.05% index yield on the investment.
I mentioned that this ETF carries preferred stocks, which leads me to my next category, an ETF of 100% preferred stocks. I love preferred stocks. They are stock-bond hybrids that trade in tight ranges, on highly solvent companies, and pay terrific yields.
GlobalX SuperIncome Preferred ETF (NYSE: SPFF) invests in the 50 highest-yielding preferred stocks in the U.S. and Canada, so you get a dollop of international exposure as well. It also sports a beta of 0.13, meaning it is only 13% as volatile as the S&P 500. It yields 6.75%.
The ETF is heavily weighted towards financials at 80% of assets, but that’s to be expected since it is primarily financial services companies that raise preferred stock capital. These companies include some world-class names like Wells Fargo (NYSE: WFC) and HSBC Holdings (NASDAQ: HSBC). It also divides the rest of its assets across materials, telecom, REITs, and energy.
I wrote about closed-end funds last week, and here’s an ETF that invests in them: PowerShares CEF Income Composite ETF (NYSE: PCEF). This is an investment that gives you diversification upon diversification. First, the ETF itself is a basket of 145 closed-end funds, each of which holds several dozen or hundred stocks themselves.
This kind of diversification gives you real safety, since only a broad market crash would take down every investment in there. It trades at an 8% discount to aggregate NAV, so you get a bargain to boot. It also offers a staggering distribution yield of 8.3%. Its beta is only 0.87, so it is only 87% correlated to the S&P 500, which makes sense considering its diversification.
Collect Dividend Income Every Month!
We’ve put together a simple calendar that pulls together all the market’s best dividends into a single, easy-to-read document. One look, and you’ll be able to set up a 12-month dividend stream for regular income every month.