The Federal Reserve has signaled that it won’t be raising rates soon, and based on all the economic data we’ve been getting, I don’t think it will raise rates for a very long time. That means many of the high-yield investments that investors have run to in order to replace non-existent bond yields should remain safe.
I don’t like that many of those investors have run into “blue-chip” dividend stocks, because valuations have been pushed way beyond what is reasonable. Instead, there are numerous other high-yield choices that offer yields that are superior to those dividend stocks and offer less downside risk.
High-yield investments include preferred stocks, exchange-traded debt, tax-free municipal bonds and business development companies. Many of these investments can be purchased via exchange traded funds, which give you the added advantage of diversification.
Here are three high-yield ETFs that yield seekers should keep an eye on.
High-Yield ETFs to Buy: iShares US Preferred Stock ETF (PFF)
Expense Ratio: 0.47%, or $47 annually for every $10,000 invested
Dividend Yield: 5.28%
The iShares US Preferred Stock ETF (NYSEARCA:PFF) is probably one of the simplest plays in the high-yield arena. Preferred stocks are my preferred method for obtaining safe high-yield dividends. That’s because preferred stocks tend to move very little in terms of price, and companies that issue them usually are so solvent that they are unlikely to face liquidity issues that prevent them from paying dividends.
Thus, since preferred stocks don’t move much in price, neither does a basket of 279 stocks of them. A look at the chart shows the PFF has barely moved since the financial crisis. Ah! But all that time it has been paying out dividends; right now, it is a high yield of 5.28%.
Take note of the chart, though. You see some occasional dips in the price and it always recovers. PFF can fall as much as 10% in times of stress and that’s a good time to add or buy in.
High-Yield ETFs to Buy: UBS ETRACS Linked to Wells Fargo (BDCS)
Dividend Yield: 8.6%
Business development companies are an interesting beast. They operate under federal regulations that require them to pay out 90% of their net income, kind of like real estate investment trusts. They are investment companies that offer debt to fast-growing companies that are generating cash flow, but need extra money to keep up with demand.
BDCs can usually obtain very favorable terms, such as interest rates in the high single digits or low-teens, as well as obtain warrants to buy equity in the company at a later date.
Because BDCs get their money from sources via debt themselves, if interest rates go higher, then their costs go up, so their spreads narrow. They can also only take on a ratio of 1:1 in terms of debt to equity.
High-Yield ETFs to Buy: WisdomTree International Large Cap Dividend Fund (DOL)
Expense Ratio: 0.48%
Dividend Yield: 7.61%
WisdomTree International Large Cap Dividend Fund (NYSEARCA:DOL) offers investments in large-cap companies located throughout the developed world, with about 24% invested in the U.K., 11% in Japan, 11% in France and 10% in Switzerland. You’ve heard of all the top-ten holdings.
It is also nicely diversified by sector — 23% financial, 12.3% consumer staples, 11% health care, 11% energy, 10.5% communications, 10% consumer discretionary and the rest among the remaining sectors.
The DOL distribution yield is 7.61%. It’s also worth noting that it’s trading near a low that it has held four times since the financial crisis — right around $37.50. At $40.88, it makes for a good entry point, or perhaps go in for a half-position.
DOL also kills two birds with one stone. If you are seeking international stock exposure, you don’t have to double up with another international ETF. This one has 281 holdings, which is more than enough for proper diversification.
As of this writing, Lawrence Meyers was long BDCS.