A strong week for the market has stocks trending up, but it also means yields on dividend stock are headed down once again. It’s an old-story for income-hungry investors: Interest rates are still near historical lows while the market is setting all-time highs, and that’s pinching yields.
Naturally, those trends have investors in dividend stocks reaching for high yield. But they need to be careful. After all, it tends to be the case that the higher the yield, the higher the risk. Bonds and dividend stocks with double-digit percent yields aren’t throwing off all that cash out of the goodness of their hearts.
That’s why it’s imperative to diversify the high-yield portion of your income and equity-income portfolios. This helps mitigate some of the risk associated with higher yielding stocks and bonds because the odds of everything going down at once are much lower than a meltdown in a single security.
One cheap and easy way to diversify your high-yield holdings in dividend stocks (and bonds) is to put together a portfolio of dividend-paying exchange-traded funds. True, narrow sector or style ETFs can be just as risky as individual stocks if the right kind of bad news comes along. But — again — a little diversification among ETFs can go along way toward boxing that risk in.
We researched and assembled a group of high-yield dividend ETFs that could really juice up your broader portfolio. This collection of global dividend stocks, preferred shares, corporate debt and even some beaten-down emerging market stocks has an average yield of more than 6%, while still being diversified and low-cost.
Read on to learn about five of the best high-yield dividend ETFs for a diversified income portfolio:
SPDR S&P International Dividend (DWX)
12-Month Dividend Yield: 6.61%
YTD Price Performance: +5%
Expense Ratio: 0.45%
The low-cost SPDR S&P International Dividend ETF (DWX) is off to a strong start this year, gaining 5% to easily outperform the major U.S., European and Asian market benchmarks. At the same time, DWX has a 12-month dividend yield of 6.71% and a SEC yield of 6.5%. Add it up and investors are enjoying a handsome combination of income and price performance.
DWX is comprised of 100 of the highest-yielding companies outside the U.S. and — unusually — it’s weighted by dividend yield. Telecoms, financials and utilities are among the fund’s top sector holdings.
Geographically, about half the fund is invested in European stocks, a third in Asia and the remainder in the Americas, excluding the U.S. Some of the largest positions held by the fund include WorleyParsons (WYGPF), AstraZeneca (AZN) and Eni (ENI).
iShares U.S. Preferred Stock (PFF)
12-Month Yield: 6.56%
YTD Price Performance: +7.2%
Expense Ratio: 0.47%
As the name makes clear, iShares U.S. Preferred Stock ETF (PFF) specializes in those stock/bond hybrids known as preferred shares, which give investors a claim on a company’s dividends, if not its earnings.
Despite the risk of rising interest rates, PFF has been another winner for the year-to-date for both price appreciation and dividend yield, helped by its concentration in financials. PFF is up 7% on a price basis with a trailing dividend yield of 6.56%, making this a winner for investors in search of high yield.
Interest-rate risk remains a concern, however, as preferred shares are acutely sensitive to Federal Reserve policy. Fed tapering weighed on preferreds in 2013, and performance tends to ebb and flow on every utterance from the Fed chief.
Global X SuperDividend ETF (SDIV)
12-Month Yield: 6.48%
YTD Price Performance: +6%
Expense Ratio: o.58%
Global X SuperDividend ETF (SDIV) is also off to a strong start in 2014, easily outperforming global stock benchmarks. The 12-month dividend yield is a generous 6.48%, while the SEC yield stands at 6.06%. Taken together, SDIV has been a high yield and total return hero for the year-to-date.
Like DWX, SDIV scours the globe for high-yield dividend stocks, but the overall composition complements more than overlaps its S&P cousin. The top sector holding for SDIV is real estate, for example.
In another break with DWX, almost 40% of SDIV holdings are located in the U.S., while Europe accounts for almost a third of the portfolio, and Asia takes up 28%. Top positions in SDIV include, including Frontier Communications (FTR), Hospitality Properties Trust (HPT) and Windstream Holdings (WIN). (FTR and WIN are always found among the top 10 S&P 5oo dividend stocks.)
Global X Brazil Mid Cap ETF (BRAZ)
12-Month Yield: 5.58%
YTD Price Performance: 0.9%
Expense Ratio: 0.69%
Emerging markets are in a funk and Brazil’s economy is a shining example of the trend. The country that puts the “B” in BRIC is struggling to hit annual economic growth of 2%. Brazil’s equities looks cheap, however, and may have found a bottom. Indeed, Brazil’s main market index is up 1.2% so far in 2014, slightly outperforming the S&P 500.
The Global X Brazil Mid Cap ETF (BRAZ) drills down on the historically remunerative mid-cap stock sector. True, it’s lagging Brazil’s market by a hair this year and is on the pricier side for an ETF, but the yield of 5.58% stands out on any screen for high-yield ETFs.
iShares iBoxx $ High Yield Corporate Bond (HYG)
12-Month Yield: 5.93%
YTD Price Performance: 2.99%
Expense Ratio: 0.5%
Okay, this last one is a bond fund, but as an ETF, it still trades on an exchange all day like a stock. Besides, it has been doing too well to ignore. The iShares iBoxx $ High Yield Corporate Bond ETF (HYG) is up nearly 3% on a price basis and sports a 12-month yield of 5.93%. True, HYG holds bonds with longer maturities — most of them mature in three to 10 years — and that does increase interest-rate risk.
The popular view was that 2014 would be a bad one for bonds, what with the Fed tapering its bond-buying program and inching inexorably closer to one-day raising its benchmark rate. And yet bonds so far are having a respectably solid year — even so-called junk bonds.
Just look at HYG, which is holding up quite well amid tapering and rate-hike chatter. Indeed, last year HYG gained 5.8% even as its bond-index benchmark fell more than 2%.
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As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.