Currently, the dividend yield on the S&P 500 is right around 2%. That underscores an issue facing many yield-focused investors: There are plenty of dividend funds out there, but not a lot of dividend funds have jaw-dropping, double-digit yields.
Of course, there are risks with high-yielding securities — namely that the yield is higher because the price has declined. With individual stocks, high dividend yields can often portend negative dividend action, such as cuts, eliminations or suspensions.
Investors willing to take some risk with high-yield dividend funds will find that just about 1% of the entire U.S. exchange-traded fund (ETF) universe sports yields of 10% or more. Even adjusting that down a little still doesn’t exactly open the floodgates.
Here’s a look at some tempting high-dividend ETFs, some of which should be avoided and some of which are worth considering.
Invesco KBW High Dividend Yield Financial ETF (KBWD)
Expense Ratio: 2.42% per year, or $242 on a $10,000 investment.
Dividend Yield: 8.3%
Many of the dividend funds that yield 8% or more are small, are leveraged or use complex methodologies. With those factors in mind, we started with the Invesco KBW High Dividend Yield Financial ETF (NASDAQ:KBWD), which yields 8.3%.
Some sectors are not known for high yields, and the broader financial services sector is one of those, but KBWD is a dividend fund that offers investors more financial services income. The high-yield objective limits KBWD’s roster to 40 stocks, many of which are mortgage real estate investment trusts (mREITs).
None of KBWD’s holdings are large-cap stocks and about two-thirds are small caps, plus the total expense ratio is 2.42%, indicating that this dividend fund needs risk appetite to be robust and the Federal Reserve to lay off rate hikes to enjoy a fruitful 2019.
Global X SuperDividend ETF (SDIV)
Expense Ratio: 0.58%
Dividend Yield: 7.9%
The Global X SuperDividend ETF (NYSEARCA:SDIV) is a dividend fund with a yield that doesn’t quite reach 8%. Still, SDIV’s 12-month dividend yield of 7.9% is tempting. This $931 million dividend fund tracks the Solactive Global SuperDividend Index.
SDIV, which pays a monthly dividend, is heavily dependent on REITs as drivers of returns. That also means there is some sensitivity to rising interest rates with this dividend fund, as SDIV devotes over 55% of its combined weight to REITs and mREITs.
Still, historical data indicates high dividend stocks can weather higher rates. In seven of the past 10 rising-rate regimes, high-dividend stocks actually topped the S&P 500, according to Global X research.
Global X Nasdaq 100 Covered Call ETF (QYLD)
Expense Ratio: 0.6%
Dividend Yield: 12.5%
The tech-heavy Nasdaq-100 Index is not known as a high-yield destination. In fact, its dividend yield is lower than the paltry 2% found on the S&P 500. The Global X Nasdaq 100 Covered Call ETF (NASDAQ:QYLD) alters that conversation in a big way.
QYLD has a trailing 12-month dividend yield of 12.5%. As its name implies, this dividend fund generates that lofty income level by using covered calls. This dividend fund targets the the CBOE Nasdaq-100 BuyWrite V2 Index.
“QYLD’s covered call position is created by buying (or owning) the stocks in the Nasdaq 100 Index (NDX) and selling a monthly at-the-money index call option,” according to Global X research. “An option is a contract sold by one party to another that gives the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at an agreed upon price (strike price) within a certain period or on a specific date. In return for the sale of the call option, the fund receives a premium, which can potentially provide income in sideways markets and limited protection in declining markets.”
iShares Mortgage Real Estate ETF (REM)
Expense Ratio: 0.48%
Dividend Yield: 10%
This dividend fund is one of the largest ETFs dedicated to high-yielding mREITs. The $1.18 billion iShares Mortgage Real Estate ETF (NYSEARCA:REM) follows the FTSE Nareit All Mortgage Capped Index and yields 10%.
While assets such as mREITs can see increased volatility as interest rates rise, REM’s three-year standard deviation of just under 11% is not alarmingly high.
It’s important to understand that mREITs make money by borrowing money at short-term rates and lending that capital out at higher rates, meaning a rapid rise in short-term rates highlights some of the vulnerabilities associated with this asset class.
VanEck Vectors BDC Income ETF (BIZD)
Expense Ratio: 9.41%
Dividend Yield: 9.6%
Investors looking for high-yielding, alternative assets may want to consider business development companies (BDCs). BDCs are structured like REITs, meaning 90% of profits are typically paid out in the form of dividends.
Clearly, the rub with the VanEck Vectors BDC Income ETF (NYSEARCA:BIZD) is its high expense ratio. However, there is more to this dividend fund’s expense story.
“An SEC rule addressing funds of funds (such as BIZD) adopted in 2006, requires a fund of funds to report a total expense ratio in its prospectus fee table that accounts for both the expenses that a fund pays directly out of its assets (direct expenses), and the expense ratios of the underlying funds, including business development companies (BDCs), in which it invests are called acquired fund fees (AFFEs). AFFEs are indirect expenses,” according to VanEck.
Bottom line: This dividend fund’s true expenses to investors are closer to 0.41% annually and BIZD yields over 9%.
VanEck Vectors Mortgage REIT Income ETF (MORT)
Expense Ratio: 0.41%
Dividend Yield: 7.9%
Another dividend fund that highlights the income opportunities available with mREITs, the VanEck Vectors Mortgage REIT Income ETF (NYSEARCA:MORT) also falls just short of an 8% at the present moment. Home to 25 mREITs, this dividend fund follows the MVIS US Mortgage REITs Index (MVMORTTG).
“In recent years, yields from mortgage REITs have been higher than those of equity REITs and many income-oriented securities,” according to VanEck. “Mortgage REITs may potentially stand to benefit from the evolving mortgage finance market but are sensitive to interest rate and regulatory changes.”
With bond markets pricing in a slower pace of interest rate hikes this year or no hikes at all, MORT is reflecting that more sanguine outlook with a year-to-date gain of 9.4%. This dividend fund currently resides less than 6% below its 52-week high.
VanEck Vectors High Income MLP ETF (YMLP)
Expense Ratio: 0.82%
Dividend Yield: 11.3%
With the energy sector rebounding to start 2019, some of the best-performing dividend funds are those offering exposure to master limited partnerships (MLPs). The VanEck Vectors High Income MLP ETF (NYSEARCA:YMLP) holds just 18 MLPs, but this dividend fund is setting a torrid pace this year with a gain of almost 15%.
YMLP, which tracks the Solactive High Income MLP Index, has a jaw-dropping 12-month yield of 11.3%. The energy sector is widely viewed as a value play and YMLP reflects as much. This dividend fund had a price-to-earnings ratio of just 7.95x at the end of last year, according to issuer data. YMLP offers the potential for some mergers and acquisitions exposure as more general partners have been acquiring MLPs to take advantage of new tax laws.
Historically, MLPs are not intimately correlated to oil prices, but those correlations increased in recent years, making MLPs a valid income-generating but risky way to play rising oil prices. Over the near-term, the tide appears to favor MLPs.
“The [oil] market is being boosted by optimism over the higher-level trade talks between the United States and China that were completed on January 31. Also underpinning the market is strong adherence to the OPEC-led supply cuts during January,” reports OilPrice.com.
As of this writing, Todd Shriber did not own any of the aforementioned securities.