Investors have gotten used to weak yields in many corners of the market. The dividend yield of the S&P 500 as a group is roughly 2.0%, and the 10-year U.S. Treasury bond doesn’t offer much more at just 2.2% yield.
That’s difficult for dividend stock investors looking for income in retirement. After all, even with a $1 million portfolio, a 2.0% annual yield on your investments would deliver just $20,000 to live on. If you’re lucky that will pay for property taxes, utilities and groceries.
If you’re looking for a bigger income stream — or, if you’re just looking for a better annual return to help grow your nest egg without the risk of market volatility — then stop tinkering with conventional dividend stocks and bonds. The real income potential right now comes in high-yield ETFs that each offer yields of more than 5%.
Here are seven of my favorite funds right not to buy for big-time yield.
Dividend Funds: Global X SuperDividend
- Yield: 8.8%
The Global X SuperDividend ETF (NYSEARCA:SDIV) is a unique play on dividend investing. It chases only the highest dividend payers in the world, regardless of sector and with a laser focus on yield.
The result is a global footprint where only about half of assets are allocated to domestic stocks, and a wide scattering of sectors in the portfolio that span all nature of income-producing stocks — utilities, real estate, telecommunications and other favorites just to name a few.
The result is a big-time yield of nearly 9%, and a diversified fund that isn’t beholden to the whims of a single company or sector.
Top holdings at present include Australia’s Platinum Asset Management and China’s Guangzhou Properties — two picks you can’t trade on U.S.-based exchanges, which shows the power of using an ETF to find high-yield investments in less popular markets.
Dividend Funds: PowerShares REIT ETF
- Yield: 7.1%
The PowerShares KBW Premium Yield Equity REIT Portfolio ETF (NYSEARCA:KBWY) is a high-yield fund that focuses on real estate investment trusts or REITs.
Real estate is one of the most reliable investments out there, because it is tied to a hard asset instead of just patented technology or financial instruments on paper. And REITs are a special kind of publicly traded real estate company that is given tax breaks on real estate holdings as long as the corporation returns 90% of its taxable income back to shareholders.
Many REITs are structured as landlords that lease office or retail space, meaning reliable payments from tenants to create reliable cash flow. That’s all but guarantees consistant dividend payouts to shareholders.
KBWY is one of the most popular real estate investment funds out there, with top holdings including retail operator Washington Prime Group (NYSE:WPG) and office space company CBL & Associates (NYSE:CBL) among others.
Dividend Funds: YieldShares High Income ETF
- Yield: 7.9%
The YieldShares High Income ETF (NYSEARCA:YYY) is another diversified income fund that plays the best income-generating parts of the market. This includes real estate, energy and even the bond market. But it’s interesting in that it does so by investing in closed-end funds instead of directly into these asset classes.
The result is a very diversified mix of already diversified funds and an amazing yield that is currently about 8%.
Top holdings right now include closed-end funds such as the Eaton Vance Tax-Advantaged Global Dividend Income Fund (NYSE:ETG) and Alpine Total Dynamic Dividend Fund (NYSE:AOD) among others.
Dividend Funds: ETRACS BDC ETN
- Yield: 8.8%
The ETRACS Wells Fargo Business Development Company Index ETN (NYSEARCA:BDCS) is a mouthful of an ETF, but the yield that approaches 9% makes it worth learning about.
Business Development Companies, or BDCs, operate as a kind of investment fund despite being a publicly traded company. These stocks take debt and equity investments in mid-sized companies and share their success with shareholders.
The BDCS fund, then, is kind of a fund of funds — a pool of these individual business development companies.
The typical business development company offer big payouts to shareholders, based on the interest payments on debts issued and profits made from their equity investments.
And since the ETRACS ETN holds dozens of these BDCs, you can tap into the income-producing power of these investments but with much less risk. After all, even if one single BDC makes a bad loan you have dozens of others to keep paying you.
Top h0ldings right now are Ares Capital (NASDAQ:ARCC) and Main Street Capital (NYSE:MAIN)
Dividend Funds: SPDR High Yield Bond ETF
- Yield: 6.2%
The SPDR Bloomberg Barclays High Yield Bond ETF (NYSEARCA:JNK) provides investors access to high-yield corporate debt, or “junk bonds.”
As the moniker suggests, junk bonds are typically loans to lower quality companies that don’t always have the brightest future. Currently, JNK holds debt from companies including tech stock Western Digital Corp (NASDAQ:WDC) and Valeant Pharmaceuticals Intl Inc (NYSE:VRX) among others.
These are not sure-thing companies, so there’s clearly some risk here in lending to them. But the good news is that a diversified portfolio of these bonds allows you to tap into the higher yields of the space but also avoid putting all your eggs in one basket.
Even if a few loans sour, on balance the fund should do just fine.
Dividend Funds: iShares Preferred Stock ETF
- Yield: 5.3%
The iShares U.S. Preferred Stock ETF (NYSEARCA:PFF) invests exactly in what it sounds like – preferred stock of U.S. corporations. A kind of hybrid between stocks and bonds, preferred stock typically offers a bigger stream of income than conventional dividend stocks and less volatility than common stock.
For instance, right now the PFF fund owns preferred stock in banks Wells Fargo (NYSE:WFC) and HSBC (NYSE:HBC) that both yield significantly higher than their common shares.
The only thing to be wary of is that preferred stock is a preferred way among banks to access additional capital, so this fund actually has more than half its assets in financial institutions like WFC and others.
But the heavy weighting toward the sector may be worth it for those seeking bigger yields.
Dividend Funds: Alerian MLP ETF
- Yield: 7.8%
The energy sector has been in a world of hurt over the last few years, and the Alerian MLP ETF (NYSEARCA:AMLP) has seen trouble, too. In fact, this year the fund is down by double digits despite the rally across the broader stock market.
But if you’re comfortable with energy exposure, you won’t find a better place to seek yield than in master limited partnerships – or MLPs. This special class of company treats shareholders as profit-sharing partners, meaning a mandate for big-time payouts.
Magellan Midstream Partners (NYSE:MMP) and Enterprise Product Partners (NYSE:EPD) are two top holdings at present.
As of this writing, Jeff Reeves did not hold a position in any of the aforementioned securities.