If you’re looking for dividend ETFs that actually dole out high yield … well, the good news is, you don’t really have to look far.
In the world of 2,013 exchange-traded funds listed in ETFdb’s database, a mere 339 — or 17% — sport simply “good” yields of more than 3%.
If you actually want “great” yields of 5% or more, you’re looking at just 121, or just 6% of U.S.-listed ETFs in the screen. That number is even smaller when you consider that numerous listed yields are affected by one-time special dividends within their holdings and other data issues.
In other words, true high-yield dividend ETFs are a pretty small world. And not all of them are gems.
If you want to bring home big-time income, you’re going to want to turn your focus toward the ETFs that invest in some of the market’s main big-income industries. That includes things such as master limited partnerships (MLPs), business development companies (BDCs) and other high-yield bowls of alphabet soup.
The following five high-yield dividend ETFs, then, certainly have their risks … but they’re also among some of the best sources of diversified high income on the market.
In order of yield, from just under 6% to over 20% …
High-Yield Dividend ETFs: PowerShares Preferred Portfolio ETF (PGX)
Type: Preferred Stock
Dividend Yield: 5.6%
Expenses: 0.5%, or $50 annually on every $10,000 invested
Preferred stocks are among the least-risky ways to get high yield. The tradeoff is that they’re also one of the lowest-upside ways.
Preferreds, which sometimes are referred to as stock-bond “hybrids,” feature some characteristics of common stocks, but also some characteristics of bonds. They trade on public exchanges just like common stock, and they also represent ownership in the company. But they also pay a set dividend much like a bond’s coupon, and they tend to trade in a band around their par value — meaning they don’t tend to move much in either direction.
And the “preferred” moniker? That comes from the fact that preferred shares are higher up on the priority line when it comes to dividends — they must be paid out to preferred shareholders before common shareholders. And a company must cut its common dividends before touching its preferreds. Even then, if the company wants to reinstate the dividend, dividends must be carried forward and paid out to preferred shareholders first.
The PowerShares Preferred Portfolio ETF (NYSEARCA:PGX) is a traditional preferred stock fund that holds nearly 260 different issues from a number of companies.
I say it’s “traditional” because most preferred stock funds are high-yield dividend ETFs that have a high percentage of holdings from financial-sector companies. PGX is no different. About 75% of the fund is invested in bank and other financial preferreds — such as HSBC Holdings plc (ADR) (NYSE:HSBC) and Barclays PLC (ADR) (NYSE:BCS). Utilities (8%), real estate (8%) and telecom (5%) are the only other meaningful slivers of the pie.
What makes PGX stand out is its global focus, which has helped it outperform many U.S.-centric peers such as the iShares U.S. Preferred ETF (NYSEARCA:PFF) and other peers.
High-Yield Dividend ETFs: PowerShares KBW Premium Yield Equity REIT Portfolio (KBWY)
Type: Equity REIT
Dividend Yield: 6.9%
Real estate investment trusts (REITs) are a business structure created by Congress that provides tax advantages for companies that own and operate real estate. But in exchange for dodging corporate taxes, they have to pay out 90% of their taxable income as dividends to shareholders.
Hence, REITs — with their typically high yields — are a close, dear friend to income hunters.
Many REIT ETFs out there tend to concentrate holdings in the biggest names, which often results in surprisingly low yields of 3% to 4% in offerings from Vanguard, Fidelity and the like. However, the KBWY invests in 30 small- and mid-sized REITs, then assigns weights based on yield, so you get what you came for with a nearly 7% trust.
The fund is filled with straightforward REITs, such as senior housing play New Senior Investment Group Inc (NYSE:SNR) and retail-focused CBL & Associates Properties, Inc. (NYSE:CBL). But it even holds the likes of Geo Group Inc (NYSE:GEO), the controversial owner and operator of corrections centers and mental health facilities.
High-Yield Dividend ETFs: VanEck Vectors Mortgage REIT Income ETF (MORT)
Dividend Yield: 8%
Expenses: 0.41% (includes 16-basis-point fee waiver)
While so-called “equity” REITs own and operate actual properties, there’s also another class of trust called a “mortgage REIT,” or mREIT. These companies borrow funds to buy mortgages and mortgage-backed securities, then make profits based on the spread between the interest rates they borrow at and that they collect at.
mREITs often leverage debt to juice their results, which adds increased interest-rate risks and typically makes them much more volatile than their equity brethren. But they also pay out much more to compensate.
The few mREIT funds out there, then, tend to be pretty high-yield dividend ETFs. The VanEck Vectors Mortgage REIT Income ETF (NYSEARCA:MORT), for instance, yields 8% from its basket of 26 stocks that pretty much covers the publicly traded mortgage REIT world.
It’s a lopsided basket, too, with Annaly Capital Management, Inc. (NYSE:NLY) at 14% of the fund’s weight and AGNC Investment Corp (NASDAQ:AGNC) at 8%. All told, the top five holdings make up roughly 40% of the ETF’s weight.
High-Yield Dividend ETFs: ETRACS Linked to the Wells Fargo Business Development Company Index ETN (BDCS)
Type: Business Development Company
Dividend Yield: 8.1%
Business development companies help grease the wheels of American commerce by lending money to small- and mid-sized businesses that might otherwise have difficulty raising capital. The upside to that kind of business is with higher risk comes higher rates.
Like REITs, BDCs are a creation of government and enjoy special tax considerations as long as they divvy out 90% or more of their income.
The BDCS is actually an exchange-traded note (ETN), not an ETF. Whereas ETFs actually hold various assets, ETNs are merely debt securities put into an fund-like “wrapper” that returns the performance (and in this case, dividends) of some sort of index. In this case, it’s a Wells Fargo index of 41 business development companies. Top holdings include the likes of Ares Capital Corporation (NASDAQ:ARCC), FS Investment Corporation (NYSE:FSIC) and Prospect Capital Corporation (NASDAQ:PSEC) — each of which make up more than 9% of the fund.
Collectively, they produce a nearly 8% yield, but if that’s not enough for you, you could always consider BDCS’ sister fund, which yields nearly 12%.
You’ll also notice that this ETF has an exceedingly high fee. BIZD and other ETFs sometimes list “acquired fund fees” that reflect the expenses of their holdings. But don’t sweat it too much — these acquired fund fees are already represented in the performance of the BDCs.
High-Yield Dividend ETFs: Infracap MLP ETF (AMZA)
Type: Master Limited Partnership (Energy)
Distribution Yield: 22%
Last, we come to MLPs. Master limited partnerships are yet another tax-advantaged business structure that results in high yields. Unlike REITs and BDCs, though, MLPs pay “distributions” — often high ones — that are like dividends, but have their own taxation hassles.
MLP ETFs typically dole out sizable yields, but the Infracap MLP ETF (NYSEARCA:AMZA) really takes the taco with a yield north of 20%.
AMZA holds the likes of Energy Transfer Partners LP (NYSE:ETP) and Williams Partners LP (NYSE:WPZ), at high weights of 19% and nearly 12%. In fact, nearly 60% of the fund’s assets are amassed in just five holdings.
AMZA is different from other MLPs in a few ways, too. In addition to investing in MLPs (with an eye for value), it also invests in general partners that manage the MLPs. And this high-yield dividend ETF also can use covered calls, short selling, leverage and derivatives to sustain its eye-popping payout.
Just be warned: While the yield is great, actual price performance has been pretty miserable. The fund has declined more than 60% since 2014 inception … though to be fair, that’s also amid a prolonged period of weakness for energy.