The Federal Reserve took interest rates to near zero and Treasury yields are tumbling, putting added emphasis on steady streams of income, including monthly dividend ETFs.
As their name implies, exchange-traded funds with monthly dividends deliver distributions each month, whereas many of their counterparts do so on a quarterly basis. For those new to the world of ETFs, it’s commonplace that fixed income funds pay interest every month …
But the universe of equity-based funds that are monthly dividend-payers is significantly smaller.
Then there’s the matter of the weakening equity market. When it comes to dividends in the current climate, investors’ priority shouldn’t be how frequently the payouts arrive. Rather, it’s the viability of those dividends and the company’s ability to grow payouts.
Taking those factors into consideration, let’s examine a few of the best monthly dividend ETF options here, including the following:
- WisdomTree U.S. Quality Dividend Growth Fund (NASDAQ:DGRW)
- Nationwide Risk-Managed Income ETF (NYSEARCA:NUSI)
- WisdomTree SmallCap Dividend Fund (NYSEARCA:DES)
Let’s get into why these funds may be worth considering, particularly at the monthly dividend ETFs that have been unfairly gutted relative to recent highs.
Monthly Dividend ETFs to Buy: WisdomTree U.S. Quality Dividend Growth Fund (DGRW)
Expense ratio: 0.28% per year, or $28 on a $10,000 investment
First, let’s get the bad news out of the way. The WisdomTree U.S. Quality Dividend Growth Fund is off 29.64% just this month and resides 30.15% below its 52-week high. That slumped DGRW’s yield to 2.82%, one of the highest such percentages for the fund since it came to market nearly seven years ago.
Those percentages are ugly. No denying that, but among monthly dividend ETFs, DGRW has several perks. One that’s particularly relevant in the current environment is what’s NOT found in this fund. That being large exposure to the high-yielding energy and real estate sectors, two groups that appear poised for a spate of negative dividend action over the near-term. Those sectors combine for just 1.03% of DGRW’s weight.
On a related note, due to a methodology that is more about what a company’s future dividend habits will be and less about what that company has done in the past, DGRW does an admirable job of not only identifying companies that can sustain payouts, but grow those dividends, too.
To the point of DGRW’s sector allocations, the fund features a nearly 22% weight to technology stocks, one of the highest allocations to the group in the dividend fund category. Among the fund’s top holdings are Microsoft (NASDAQ:MSFT) and Apple (NASDAQ:AAPL), two companies with the balance sheets to not only weather a downturn, but continue growing dividends during rough times as well.
Nationwide Risk-Managed Income ETF (NUSI)
Expense ratio: 0.68%
Keeping with theme of generating income from technology stocks, the Nationwide Risk-Managed Income ETF offers investors an interesting way of hedging long positions in funds tracking the Nasdaq-100 Index or stocks such as Apple and Microsoft.
NUSI is a “rules-based options trading strategy that seeks to produce high income using the Nasdaq-100 Index,” according to Nationwide.
In plain English, NUSI generates income via covered call writing on the Nasdaq-100 and uses a portion of those proceeds to buy puts on that index, thereby giving investors a hedge.
That doesn’t mean NUSI is perfect. It’s down 11.11% this month, but that’s better than the 27.29% shed by the Nasdaq-100 and this monthly dividend ETF had a yield of 7.83% at the end of last year, well above the current yield of 0.87% on the Nasdaq-100.
WisdomTree U.S. SmallCap Dividend Fund (DES)
Expense ratio: 0.38%
Small-cap stocks have been absolutely torched in the recent downturn with the Russell 2000 recently probing multi-year lows and is off about 40% this month, a decline mirrored by the WisdomTree U.S. SmallCap Dividend Fund.
Recent weakness in the monthly dividend fund may be a case of the baby thrown out with the bath water because DES has a long history of being one of the higher quality options among small-cap funds. The issue today is DES being tarnished by talk that many smaller companies gorged on debt during the bull market and now face the specter of crimped balance sheets.
That’s probably true for some small-cap growth companies but DES dances between the quality and value factors, confirming that its recent bloodletting is perhaps a case of too much too soon. The risk here is DES’s 27.11% weight to financials, the smaller ones of which are under interest rate pressure.
However, DES remains home to some credible takeover targets – assuming a recession is brief – and it’s yield of nearly 4.10% is a whopper among small-cap funds even though it’s not a yield-based strategy.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he owns shares of DES and DGRW.