While the Fed’s recent tapering of its quantitative easing programs will affect long-term bond yields, the central bank has pledged to keep short-term interest rates at near zero for quite some time. These are the interest rates that effect things like savings accounts, certificate of deposits and money market funds.
And with many of these traditional income instruments — along with most bonds — still not really paying enough to beat inflation, most investors looking for income have plowed headfirst into all sorts of real estate investment trusts (REITs), master limited partnerships (MLPs) and dividend paying stocks.
But what if those dividends still aren’t enough? Sometimes a measly 3% dividend yield isn’t going to cut it.
Luckily for investors, there are ways to “go for broke” when it comes to high dividend yields — namely, exchange-traded funds (ETFs). By using broad dividend ETFs, investors can realize diversification benefits and spread-out their bets in some pretty risky — and high-yielding sectors.
For investors seeking to add a hefty dividend yield to their portfolio, the following ETFs might just be up your alley.
Yorkville High Income MLP ETF (YMLP)
There are plenty of exchange-traded ways to get your master limited partnership fix — 18 different ETFs/ETNs to be exact. However, the Yorkville High Income MLP ETF (YMLP) pays out the most in distributions.
Currently, YMLP has a dividend yield of a whopping 8.92%. That’s pretty high, even by MLP standards.
YMLP does this by tracking the usual boring pipeline and midstream firms, as well as shipping, fertilizer, mining and upstream energy production companies structured as MLPs. The ETF’s index — The Solactive High Income MLP Index — then sorts them by highest dividend yield to create its underlying portfolio.
Top holdings for the dividend ETF include dry bulk shipper Navios Maritime Partners (NMM) and coal-royalty firm Alliance Resource Partners (ARLP).
This multi-faceted approach provides investors with a high dividend yield and exposure to a wide range of sectors using the MLP tax structure. In also helps on the returns side.
Overall, YMLP had a pretty good year in 2013, with shares of the dividend yield rising 16%. Expenses for the dividend ETF are a bit on the high side (0.82%, or $82 for every $10,000 invested) when you consider the tax implications of the fund, as YMLP is structured as a c-corporation.
iShares Mortgage Real Estate Capped (REM)
Most investors are familiar with equity real estate investment trusts (REITs). These are the stocks that own actual shopping malls, office buildings and other property. However, there is another kind of REIT — mortgage REITs (MREITs).
MREITs don’t actually own physical buildings, but invest in mortgage-backed securities or issue financing for others. They often borrow money themselves and use that leverage to invest in other mortgages.
They’re a complex bailiwick for most investors to understand, but they do kick off some amazingly high dividends. Which is why the iShares Mortgage Real Estate Capped ETF (REM) could be the best way to seek out high dividend yield.
REM tracks 37 different MREITs across the agency and non-agency subsectors. That dual focus allows the dividend ETF to throw off a huge 15.6% dividend yield.
While the Fed’s tapering has resulted in some recent capital losses for MREITs, many analysts now predict that the bulk of the sector has deleveraged and moved most of their own lending into floating rate loans. That should provide a floor for the REM’s share price and its huge dividend yield.
Expenses run 0.48%.
UBS E-TRACS Wells Fargo Business Development Company ETN (BDCS)
For many midsized companies, finding sources of capital can actually be quite difficult. Too small to issue a full corporate bond and too large to go their local bank branch and request a loan, many midsized firms often turn to business development companies (BDCs) to get the funding they need.
Investors can basically think of BDCs as publicly traded, private equity or venture capital firms. The kicker is that, like REITs, BDCs must kick out at least 90% of their income back to shareholders as dividends. That results in some large dividend yields for the stocks.
The UBS E-TRACS Wells Fargo Business Development Company ETN (BDCS) tracks 32 business development companies, including industry stalwarts like Apollo Investment (AINV) and BlackRock Kelso Capital Corporation (BKCC). If those names sound familiar, they should. Many of the country’s biggest private equity players have publicly traded BDC divisions.
The key selling point for investors is that BDCS features a large dividend yield of 7.25%. As a bonus, BDCS’ underlying index has managed to produce a huge 213% total return over the past five years. In comparison, the S&P 500 index only managed to produce 128%.
Market Vectors CEF Municipal Income ETF (XMPT)
At first blush, the Market Vectors CEF Municipal Income ETF’s (XMPT) 5.84% dividend yield may not be enough to get your heart pumping. That is, until you realize that dividend yield is actually tax-free. Meaning, if in you’re in the 33% tax bracket, you’d have to earn a 10% dividend yield to get the same amount of income elsewhere.
The secret is that XMPT invests in closed-end funds (CEFs) that invest in tax-free municipal bonds. CEFs are a kind of combination of ETFs and traditional mutual funds. While they can invest in anything, the bulk of CEFs are in the muni bond space.
XMPT tracks 85 of the largest muni bond CEFs and uses their underlying leverage to produce a big tax-free dividend yield for its shareholders. Is it a quirky dividend ETF? Very much so. But it is one of the biggest ways investors can get a high dividend yield tax-free. XMPT’s rival — the iShares National AMT-Free Muni Bond (MUB) — only pays around 2.95% in dividends.
Expenses for the XMPT dividend ETF run 1.65%.
First Trust Multi-Asset Diversified Income (MDIV)
Want a high yield, but don’t want to be bogged done by just one sector or security type? Then a multi-asset dividend ETF is for you. And the First Trust Multi-Asset Diversified Income (MDIV) is the highest yielding one available, with a 5.9% dividend yield.
MDIV basically owns various high yielding asset classes — including REITs, MLPS, preferred stocks, dividend paying equities and junk bonds. It currently gains that high bond exposure through the iShares iBoxx $ High Yield Corporate Bond ETF (HYG).
While MDIV isn’t as high yielding as some of the others on this list, its diversification and one-ticker access to these asset classes makes it a prime choice for those investors looking for bigger dividends. Many investors must agree — in its 18 months of existence, MDIV has accumulated a huge $530 million in assets so far.
Expenses for MDIV run 0.60%.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.