One of the greatest inventions in the stock market is the exchange-traded fund, and it’s a specifically helpful tool for income investors considering the glut of dividend ETFs on the market.
These baskets of stocks took the whole concept of a mutual fund and made the same product available to investors — just at a much lower cost. In addition, ETFs give investors the opportunity to move in and out of funds just as they would other stocks.
And while you lose the notion of true, 100% active management, the number of managers who have repeatedly beaten the market or mechanical models remains small.
The rise of the ETF has been a particular boon for investors in dividend stocks, as these equities are bundled into dividend ETFs that can often offer very attractive yields. Plus, a lot of overlooked stocks get exposure this way, so you get some diversification with your high yield.
Dividend ETF #1: PowerShares KBW High Dividend Yield Financial ETF (KBWD)
Dividend Yield: 7.7%
PowerShares KBW High Dividend Yield Financial ETF (KBWD) is one of the highest-yielding dividend ETFs available, and it’s powered primarily by dividend stocks dealing in financial services.
I like KBWD because it bundles higher-risk dividend stocks from multiple sectors, thereby giving you diversification. It has companies like Capstead Mortgage (CMO), which invests in mortgage securities and is structured as a REIT. These mREITs are subject to interest-rate fluctuations, as they make their money off the spreads between what they borrow and what their securities yield. KBWD also contains Business Development Companies like PennantPark Investment Corp (PNNT) and Ares Capital (ARCC).
Also attractive is the fact that KBWD’s top 10 holdings represent roughly 37% of its total assets, which isn’t overly concentrated.
Naturally, the big draw is its whopping 7.7% dividend yield, though that certainly comes at a price — KBWD charges 1.48% in expenses, or $148 annually per every $10,000. Still, even if you take fees out of the annual dividend, you’re yielding more than 6%.
I also like that KBWD’s beta (risk compared to overall market) is 0.75, or 25% less risky than the market but delivers an alpha of 4.6, or 4.6% over a comparable market index.
Dividend ETF #2: Global X SuperDividend ETF (SDIV)
Dividend Yield: 6.9%
Global X SuperDividend ETF (SDIV) is the second-highest yielder, and as the name implies, focuses on international stocks. The top 10 holdings only represent 15% of assets here, with eight of them coming from abroad and only R.R. Donnelly & Sons (RRD) and Northstar Realty (NRF) from the U.S. International holdings include trade insurer Euler Hermes, water cleaner Suez Environmental and a French utility.
I like that this dividend ETF takes high-yielding companies from around the world, and in large number (93 holdings currently). That gives you diversification, and simply so — important for many individual investors who are just generally unfamiliar with global stocks.
The yield on SDIV is 6.9%, and that comes at a much cheaper expense ratio (0.58%) than KBWD.
Dividend ETF #3: YieldShares High Income ETF (YYY)
Dividend Yield: 5.6%
YieldShares High Income ETF (YYY) is more like a fund-of-funds dividend ETF.
YYY owns shares in a host of closed-end funds. So not only are those closed-end funds themselves diversified, but the ETF itself becomes ultra-diversified because it’s a collection of closed-end funds. The top 10 holdings take up 47% of assets, which is a little on the weighty side. Top weights go to, among others, Eaton Vance Enhanced Equity Income II (EOS), which itself has Google (GOOG) as its top holding, and Eaton Vance Tax-Managed Global Dividend Equity Income (EXG), which has Nestlé (NSRGY) as its top holding.
I love the broad diversification here, which doesn’t include stocks that pay dividends, yet it still yields 5.6%. However, expenses are high at 1.65%
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.