5 ETFs for Dividend-Hungry Investors
Oct 3rd 2011 10:16AM
Updated Oct 3rd 2011 10:18AM
Throughout their existence, exchange-traded funds have always followed popular investing trends in the overall market. With so many investors focused on getting as much income as possible from their portfolios, it only makes sense that ETF managers have moved toward producing as much income as possible for their shareholders.
In fact, some ETFs focus exclusively on dividend-paying stocks, including Vanguard High Dividend Yield (NYS: VYM) and Vanguard Dividend Appreciation (NYS: VIG) . But not all high-income ETFs conveniently include the "dividend" label in their name. To get the top-paying ETFs, you need to do a little digging. Let's take a look at five ETFs that have yields that will make any income investor happy.
1. iShares FTSE NAREIT Mortgage Plus (NYS: REM)
Just as the place to find top yields in stocks is in the mortgage REIT sector, this ETF, which focuses on mortgage real estate investment trusts, passes through the healthy dividends of its holdings on to ETF shareholders. Currently, the ETF has an SEC yield of 12.7%, and its 12-month yield is only a little lower at 11.7%.
Holdings for the ETF include all the most popular mortgage REITs, including Annaly Capital and American Capital Agency. But you'll also find some other financial stocks that are linked to the mortgage industry but which have much lower yields than the average mortgage REIT. For pure mortgage-REIT coverage, you might prefer to go with the brand new ETF Market Vectors Mortgage REIT, which doesn't report a yield yet but which owns most of the same high-yielding mortgage REITs without the other stocks pulling down the average dividend.
2. ALPS Alerian MLP (NYS: AMLP)
Another popular place to find high yields lately has been from master limited partnerships. These investments, which usually focus on energy and natural resources, not only pay out high distributions but also have some preferential tax treatment from those distributions. With a few MLPs paying double-digit percentage yields and many more in the high single digits, it's no surprise that this ETF weighs in with a 6.5% 12-month yield.
Holdings include the popular MLPs Enterprise Products Partners and Kinder Morgan Energy Partners. And with quarterly dividends, the ETF does a good job of getting the income its investments generate out to shareholders regularly.
3. PowerShares CEF Income Composite (NYS: PCEF)
To find more income, this ETF goes to the closed-end fund universe. These little-followed investments often trade at a discount to the value of their assets, providing bargain opportunities for investors. In addition, many of them borrow money to get leveraged exposure for their portfolios, which can boost income when conditions are favorable. The fund has used its strategy to produce a 9% yield over the past 12 months.
Most of the closed-end funds that this ETF owns focus on fixed-income investments like bonds rather than stocks. However, it also includes closed ends that use options strategies and other novel methods for producing income. Recently, the fund's share price has dropped along with the stock market, but over longer periods, it has tended to be much more stable than the stock market.
4. iShares iBoxx High Yield Corporate Bond (NYS: HYG)
Beginning investors may not understand that most of the time, interest rates on bonds are much higher than dividend yields on stocks. But with the Federal Reserve pushing rates down, Treasury yields have fallen below the dividend yield on the S&P 500.
Some high-yield bonds still pay healthy levels of income. This ETF focuses on "junk" bonds whose credit ratings indicate a fairly substantial risk of default. As a result, part of the current SEC yield of 8.2% has to reimburse you for any losses that occur from defaults. But as an alternative to stocks, having some of your portfolio in high-yielding bonds can make sense.
5. PowerShares Preferred (NYS: PGX)
Another area to find high dividend yields is in preferred stock. This ETF has produced a 7% yield by investing in preferred shares of many companies, including Citigroup and General Electric.
Preferred stock doesn't have the same upside as common stock, but it also tends to be more stable and pay higher yields. For income investors, a preferred-oriented ETF is a logical choice to consider.
With so many ETFs available for investors looking for high yield, you don't have to stick to traditional dividend stocks. These five ETFs actually give you a fairly diversified portfolio that gives you exposure to several different asset classes.
Get some more great ETF ideas in this Motley Fool free special report. You'll find the names of three more strong ETFs along with techniques for finding the best ETFs around.
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At the time this article was published Fool contributor Dan Caplinger likes it when companies show him the money. He owns shares of Vanguard Dividend Appreciation ETF. The Motley Fool owns shares of Johnson & Johnson. The Motley Fool owns shares of Citigroup and Annaly Capital Management. Motley Fool newsletter services have recommended buying shares of Enterprise Products Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy stays hungry, my friend.
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