One of the great benefits of exchange-traded funds is that they permit investors easy access to a diversified basket of stocks, just like mutual funds, but usually at lower expense ratios.
The beauty of a dividend ETF in this context is that investors can create a basket of dividend stocks, and because there are so many dividend ETFs, they can target an overall desired yield.
The level of risk among dividend ETFs also vary, so with careful research, one can obtain a risk-adjusted yield that reflects one’s risk profile while also earning income.
The other benefit of a dividend ETF is that if one, or even a few, stocks cut or kill their payment, the overall effect on both the price of the fund and the yield will be diluted because of the diversification.
Here are three dividend ETFs that aim for above-average yields.
High-Yield Dividend ETFs: Guggenheim Multi-Asset Income ETF (CVY)
Dividend Yield: 5.3%
Expenses: 0.73% per every $10,000
The Guggenheim Multi-Asset Income ETF (CVY) is a creative dividend fund that loads up on about 125 to 150 securities across many different types of assets.
It has about an 80% allocation to stocks, 8% to bonds and around 10% to other investments. There are also master limited partnerships, real estate investment trusts, closed-end funds and preferred stocks, which explains the 5.3% dividend yield. The ETF cut out Canadian Royalty Trusts late last year and added “momentum” as a consideration in constructing the index.
There is some downside to consider. Some of these securities are more sensitive to interest rate increases than others, especially REITs. The MLPs, of course, have had a tough couple of years because that sector has been hit hard by the oil price collapse.
CVY is probably not a dividend ETF you should hold on its own. While it is a good choice, I would be more comfortable diversifying even further with different choices for dividends. However, because CVY is quasi-actively managed, you can get a leg up over passively managed ETFs … if the managers perform, that is.
High-Yield Dividend ETFs: Oppenheimer Ultra Dividend Revenue ETF (RDIV)
Dividend Yield: 3.8%
Expenses: 0.72%
Oppenheimer Ultra Dividend Revenue ETF (RDIV) is a more traditional dividend ETF, in that it is more heavily concentrated, and has larger positions in solid blue-chip dividend stocks. There are advantages and disadvantages to this approach.
One advantage is that the top ten holdings account for half of the total asset base, and because these are all big-name stocks like ConocoPhillips (COP), Philip Morris (PM) and AT&T (T), the dividends are robust and the companies aren’t going to implode. That helps explain the ETF’s yield of 3.82%.
The other advantage is that it could be a nice core large-cap ETF holding that would fill out that aspect of your holistic asset allocation model.
But it’s not without a disadvantage, though. While the dividend yield is good, the concentration of the ETF means it is more susceptible to a decline along with the broad market. Tread carefully.
High-Yield Dividend ETFs: Exchange Traded Concepts Trust YieldShare High Income ETF (YYY)
Dividend Yield: 10.3%
Expenses: 1%
Perhaps the most interesting, albeit riskiest, of our dividend funds is the YieldShare High Income ETF (YYY). This is more like a “fund of funds”, which invests in a group of mostly closed-end funds that themselves invest in various high-yield securities.
YYY holds 32% stocks and 68% bonds, stretched across both domestic and international securities. The ETF doesn’t discriminate. There are natural resource funds, emerging market funds, funds focusing on Asia-Pacific, international debt funds, convertible debt funds — just about everything you can think of.
The yield is 10.26%, so it is obviously attractive for income hunters … but, like many of these closed-end funds, its holdings are in risky sectors. The fund itself is down 7.5% since inception, but the dividends have more than made up for it.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities.
