Let’s face facts — even if the Federal Reserve decides to raise rates next month, your savings account (or other traditional income products for that matter) aren’t going to become high yield investments overnight.
We’re looking at a token raise from the Fed if anything. Stocks and ETFs with big dividend yields are still going to be the place to find income that you can actually live off of.
But there’s a difference between an attractive yield and a drop-dead gorgeous yield.
By definition, some asset classes and securities just pay more than others. Alas, nothing in life is free. That holds true when it comes to investments with high yields. Even in sectors that are set-up as “pass through” tax structures, high yield often means higher risk.
Which is why you should use exchange-traded funds to get your fix of high dividend yields.
By using a dividend ETF, investors can realize important diversification benefits and spread out their bets in these riskier high-yield sectors. For those investors looking to add some hefty dividend yields to their portfolio, using dividend ETFs is the only way to travel down the high-yield road.
Here’s three ETFs for delivering double-digit dividend yields.
Double-Digit Dividend Yields #3: iShares Mortgage Real Estate Capped ETF (REM)
30-Day SEC Yield: 11.07%
Real estate investment trusts have long been a place to find larger-than-life dividend yields. But not all REITs are created equal.
The kind that most investors are familiar with — equity REITs — own physical buildings. There is, however, a lesser-known variety that offers real high yields — mortgage REITs. MREITs will either loan money to property owners or invest/purchase existing mortgages or mortgage-backed securities.
Add a dose of leverage and you have dividend yields in the 7% to 9% range.
REM tracks the FTSE NAREIT All Mortgage Capped Index, which is a basket of mREITS invested in commercial and residential mortgages. The dividend ETFs holdings read like a who’s who of the sector. These include sector stalwarts like Annaly Capital (NLY) and Two Harbors Investment (TWO), as well as smaller mREITS such as Five Oaks Investment (OAKS).
Given the complexities of evaluating individual mREITs, using the broad REM dividend ETF could be the best way to score the sector’s high yields.
Expenses for REM run at just 0.48%, or $48 per $10,000 invested annually.
Double-Digit Dividend Yields #2: Yorkville High Income MLP ETF (YMLP)
SEC Yield: 15.16%
As pass-through entities, master limited partnerships kick back much of their cash flows as dividends to shareholders and sponsoring general partners. Given the tax benefits and high yields, MLPs and the dividend ETFs that track them have become popular destinations for income seekers.
This fund features one of the juiciest dividend yields around at 15.16%. YMLP tracks the Solactive High Income MLP Index, which looks at current high distributions, coverage ratios and distribution growth history to create a portfolio of high-yielding MLPs.
Its focus on yield creates a different portfolio of firms than the typical MLP ETF.
A big one is that there are no pipeline stocks (which is what MLPs are known for) among YMLP’s holdings. Top sector weights for the dividend ETF include marine transportation, energy production and energy services.
These are often on the riskier side of the MLP world, as their cash flows are bound by take-or-pay contracts. As such, they provide much higher dividend yields to compensate.
In the case of YMLP, that’s a double-digit one.
Expenses for the YMLP ETF run at 0.82%.
Double-Digit Dividend Yields #1: Credit Suisse X-Links Gold Shares Covered Call ETN (GLDI)
Precious metals aren’t necessarily the first or even last place income seekers tend to look for high yields. After all, not throwing off any sort of actual dividend is one of the major criticism of the asset class.
The Credit Suisse X-Links Gold Shares Covered Call ETN (GLDI) hopes to overcome this.
GLDI basically owns shares of the uber-popular SPDR Gold Trust ETF (GLD) and then sells monthly out-of-the-money covered call options on GLD shares it holds.
These call options provide GLDI with an up front premium for the right to buy the shares at a set level. GLDI takes these premiums and distributes to its investors as hefty cash dividends.
Those dividends — albeit lumpy — currently amount to a 12-month distribution yield of 11.14%. Not bad for an investment that usually provides nothing when it comes to dividend yields.
Now there is a few caveats when it comes to GLDI. For starters, writing covered calls does limit the upside of the fund.
After all, if GLDI rallies, the options buyers will exercise their right and snag the holdings for cheap. Secondly, GDLI is an exchange-traded note. That means it actually is a debt obligation from issuer Credit Suisse, and credit risk must be considered.
Expenses for GLDI around average at 0.65%.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.