5 Top ETFs for Income Investors

by James Brumley | November 1, 2012 6:30 am

Money Dividends 185In 2009, when Apple (NASDAQ:AAPL[1]) was breaking away from the smartphone pack, the tagline “There’s an app for that” helped the company do it. It wasn’t just a mere marketing ploy, however — there really is an app for nearly any hand-held need you can think up.

Surprisingly, the ETF industry hasn’t borrowed the same tagline, though it certainly could. As of the latest count, there were more than 1,500 U.S.-listed exchange-traded funds, with hundreds more that only trade overseas. With that many choices floating around in the equity ether, it’s tough to imagine that at least one of them doesn’t fit your most stringent (or strange) income investing needs.

Feel free to ferret them out if you like. But if you just want to be pointed in the right direction, here are some great ETFs for each income-generating goal:

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Rising Dividends: SPDR S&P Dividend ETF

10/31 Yield: 3.16%
Expense Ratio: 0.35%

While a 9% yield from a stock is nice now, if the absolute payout (in dollar terms) is the same 30 years from now as it is today on the initial investment, owners have a right to be upset. The solution? A fund that makes a point of raising dividends over time, just like their underlying stocks do.

The SPDR S&P Dividend ETF (NYSE:SDY[3]) — featuring the likes of AT&T (NYSE:T[4]) and Consolidated Edison (NYSE:ED[5]) — fits the bill quite nicely.

To be fair, the per-share dividend payout hasn’t grown tremendously since the ETF’s inception in 2006. But the payout has been far more reliable than the market’s overall performance for the same period. (In other words, it’s still your best bet for dividend growth over a long stretch of time.)

As a close second in the category, consider the Vanguard Dividend Appreciation ETF (NYSE:VIG[6]). Although the current yield is anemic at 2.12%, VIG actually has demonstrated a little bit of measurable dividend growth since 2006.

See also: 25 Most Dangerous Funds to Own Now[7]

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Stable Dividends: iShares Dow Jones Select Dividend ETF

10/31 Yield: 3.49%
Expense Ratio: 0.4%

While dividend growth is important, it doesn’t do income investors a bit of good if the quarterly or monthly dividend isn’t reliable. The iShares Dow Jones Select Dividend ETF (NYSE:DVY[8]) is designed to deliver that stability. Since 2004, DVY’s quarterly dividend has never fallen below 40 cents per share, and never topped 60 cents.

On the surface, it would seem like the occasional huge payout would be nice, but with payout spikes come equally nasty payout plunges. The iShares Select Dividend Fund simply avoids that volatility altogether, holding rock-solid dividend stocks like Lorillard (NYSE:LO[9]) and Chevron (NYSE:CVX[10]).

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High Yields/High Risk: iShares iBoxx $ High Yield Corporate Bond ETF

10/31 Yield: 6.85%
Expense Ratio: 0.5%

As they say, the greater the reward, the greater the risk. If that’s true for income investors, then they can expect big things from the iShares iBoxx $ High Yield Corporate Bond ETF (NYSE:HYG[11]). Yes, it’s a “junk bond” fund, but with a yield of 6.86%, the colloquialism is irrelevant — the payout is the part to focus on.

But doesn’t junk eventually rot, break or disintegrate? Sometimes — but you might be surprised to find out some of the companies whose debt technically qualifies as “junk,” at least according to their credit rating. This fund holds debt from companies like Sprint (NYSE:S[12]), First Data and Community Health Systems (NYSE:CYH[13]). That’s not to say they’re all wildly profitable, but you certainly could do a lot worse.

The runner-up for the high-yield ETF category is the SPDR Barclays Capital High Yield Bond ETF (NYSE:JNK[14]), which currently is paying out 6.94%.

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High Yields/Low Risk: PowerShares S&P 500 Buy/Write Portfolio ETF

10/31 Yield: 10.28%
Expense Ratio: 0.75%

If you like higher-than-average payouts and are willing to adapt when the market’s environment changes, then the PowerShares S&P 500 Buy/Write Portfolio ETF (NYSE:PBP[15]) might be a better fit than a high-yield bond fund. The portfolio employs an option-trading strategy where stocks are purchased, then it sells call options against those stocks.

There’s a caveat, however. While the trailing yield of 10.28% is juicy, the fund has only managed to issue those kinds of payouts because the market environment has been volatile but indecisive. If the market starts to trend convincingly — even if slowly — the call-writing strategy starts to sputter, and PBP actually could underperform the broader market.

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Yield and Growth: Guggenheim Multi-Asset Index ETF

10/31 Yield: 5.11%
Expense Ratio: 0.78%

Last but not least, if you’re just looking for a good, all-around income ETF that you don’t have to re-assess day in and day out, then you might want to go with the Guggenheim Multi-Asset Index ETF (NYSE:CVY[16]).

As its name implies, it owns a little of everything, yields 5.11%, and is only about three-fourths as volatile as the broad market is. Yet, that same slow-and-steady diversified approach has more than paid off. How so? The Guggenheim Multi-Asset Index ETF has outperformed the S&P 500 for the past three years, as well as the past five.

Boring can be beautiful, too.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


  1. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  2. Compare Brokers: https://investorplace.com/options-trading/broker-center/
  3. SDY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SDY
  4. T: http://studio-5.financialcontent.com/investplace/quote?Symbol=T
  5. ED: http://studio-5.financialcontent.com/investplace/quote?Symbol=ED
  6. VIG: http://studio-5.financialcontent.com/investplace/quote?Symbol=VIG
  7. 25 Most Dangerous Funds to Own Now: https://investorplace.com/order/?sid=FW7306
  8. DVY: http://studio-5.financialcontent.com/investplace/quote?Symbol=DVY
  9. LO: http://studio-5.financialcontent.com/investplace/quote?Symbol=LO
  10. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  11. HYG: http://studio-5.financialcontent.com/investplace/quote?Symbol=HYG
  12. S: http://studio-5.financialcontent.com/investplace/quote?Symbol=S
  13. CYH: http://studio-5.financialcontent.com/investplace/quote?Symbol=CYH
  14. JNK: http://studio-5.financialcontent.com/investplace/quote?Symbol=JNK
  15. PBP: http://studio-5.financialcontent.com/investplace/quote?Symbol=PBP
  16. CVY: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVY
  17. [Image]: https://investorplace.com/order/?sid=JZ7698

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