When the Federal Reserve raised interest rates in December — its first such move in nearly 10 years — some income investors probably felt a chill. After all, the stage was set for the Fed to raise rates several more times this year, perhaps further pinching beloved rate-sensitive asset classes such as real estate investment trusts, master limited partnerships and utilities stocks — as well as the dividend ETFs that hold those assets.
While it is still entirely possible that the Fed raises rates multiple times this year, bond traders are not betting on too much interest rate shock in 2016. To start the year, Treasury yields have declined, boosting rate-sensitive assets and select dividend ETFs in the process.
“For the 12-month period ended January 2016, payers were down 7.31 percent, vs. a decline of 11.52 percent for the non-payers,” according to exchange-traded funds issuer First Trust. “The number of dividend increases in January totaled 29, down from 33 in January 2015. One dividend was cut, matching the dividend cut made in January 2015,”
Perhaps the invitation is not engraved, but the time could be right for income investors to revisit dividend ETFs with rich yields.
The following five dividend ETFs fit that bill, offering yields of 5% or more.
Dividend ETFs Yielding 5%-Plus: Guggenheim Multi-Asset Income ETF (CVY)
CVY Dividend Yield: 6.2%
Should Treasury yields remain low and the Fed patient with interest rates, the Guggenheim Multi-Asset Income ETF (CVY) is a prime example of a high-yield dividend ETF that should benefit.
After all, CVY and rival multi-asset ETFs were punished by fears of higher interest rates because … well, these funds are loaded with rate-sensitive assets.
In addition to traditional U.S. common dividend stocks, this dividend ETF can hold MLPs, REITs, preferred stocks and royalty trusts, among other assets.
The $445 million CVY holds 151 securities, a combined 56% of which are financial services or energy names. None of this dividend ETF’s holdings garner a weight of more than 1.4%. Familiar names held by CVY include Duke Energy Corp (DUK) and Altria Group Inc (MO).
Dividend ETFs Yielding 5%-Plus: Global X SuperDividend U.S. ETF (DIV)
DIV Dividend Yield: 6.4%
Global X SuperDividend US ETF (DIV) is a dedicated dividend ETF, but by virtue of its emphasis on some low-volatility sectors and dividend stocks (utilities and staples combine for over 35% of the ETF’s weight), this is a dividend ETF with the look of a low-volatility fund. A standard deviation of just 9.7% confirms as much.
That also means DIV is exactly the type of dividend ETF that gets punished by higher interest rates and comes into favor as Treasury yields ebb. Although DIV is not a multi-asset ETF in the same vein as CVY, this dividend ETF does hold MLPs and REITs.
Dividend ETFs Yielding 5%-Plus: SPDR S&P Emerging Markets Dividend ETF (EDIV)
EDIV Dividend Yield: 5.5%
Emerging-market equities and the corresponding ETFs continue to disappoint investors, particularly those investors who thought 2016 would bring better things after developing-world equities slumped mightily in each of the past two years.
Unfortunately, emerging-market dividend ETFs have not provided much shelter from the storm.
What is surprising, as it pertains to this particular dividend ETF, is why Russia has been a thorn in the fund’s side. Simply put, SPDR S&P Emerging Markets Dividend ETF (EDIV) does not have enough exposure to Russia. This EDIV ETF devotes just 6.5% of its weight to Russian stocks — not good in a year in which the country is home to the best-performing (or at least, least-worst) BRIC equity market.
A bright spot for EDIV is that it allocates nearly 29% of its weight to Taiwanese stocks, and Taiwan is one of the least volatile emerging markets.
The rub is by virtue of its combined 26.5% weight to South African and Brazilian stocks, EDIV is a dividend ETF that needs commodities prices to rise.
Dividend ETFs Yielding 5%-Plus: iShares International Select Dividend ETF (IDV)
IDV Dividend Yield: 5.4%
The iShares International Select Dividend ETF (IDV), as its name implies, is an international dividend ETF, but conservative investors do not need to fret about direct emerging-market exposure with this fund.
IDV is dedicated to developed markets.
The $2.3 billion IDV, which yields nearly 5.4% on a trailing 12-month basis, represents an avenue to ex-U.S. dividend growth as Australia and the U.K. combine for 48% of the ETF’s geographic weight. That is notable because the U.K. is the largest developed dividend-paying region, in dollar terms, after the U.S. Additionally, Australian dividend growth has been among the most impressive in the developed world in recent years.
IDV’s country lineup also includes several nations where the benchmark equity index sports a higher dividend yield than 10-year government bonds. France and Sweden are examples of that and those two combine for about 11% of IDV’s weight.
Dividend ETFs Yielding 5%-Plus: PowerShares Variable Rate Preferred Portfolio (VRP)
VRP Dividend Yield: 5.2%
Preferred stocks and the ETFs that hold those stocks typically reside in the high-yield category, so this list of dividend ETFs could include nearly every preferred ETF available to investors today. PowerShares Variable Rate Preferred Portfolio (VRP) gets the call here because it is different than its preferred ETF rivals.
VRP has one of the most unique spins on the usual tried-and-true preferred stock ETF for one simple reason: It is designed to be less sensitive to rising interest rates than traditional preferred ETFs.
“Debt securities with floating or variable rates may help protect investors from a rising rate environment. Even if maturities extend beyond a call date, interest rate risk can be much lower and is limited to the time until the next rate reset,” according to a research note from PowerShares.
VRP’s modified duration is less than three years.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.