The 10 Highest Yielding Dividend Stock ETFs for a Low-Rate World


Federal Reserve Chairman Jerome Powell said this week that the central bank “will provide the economy with the support it needs for as long as it takes.”

That means low interest rates are likely to persist, keeping income-generating investments at bay.

One way to get ahead is with dividend stocks and the exchange-traded funds that hold them. Below is a list of the US ETFs with the highest dividend yields – ranging from 4.9% to 9.8%.

Mark Grant, B. Riley Financial’s top global fixed income strategist, wrote in his “Out of the Box” email on March 22 that, with inflation at 1.68% last month, “you have to beat that rate to get any kind of ‘real return’, or you’re just playing mahjong ”with inflation and the Federal Reserve.

With prohibitively low bond yields, you favor closed funds and exchange-traded funds to meet that income goal. He cautioned that investors should do their homework to select the right ones.

ETFs are easier to analyze than closed funds, especially ETFs with diversified portfolios.

Focus on revenue, not growth

There is a difference between investing to grow and investing to generate income. The goal of an income portfolio is not to exceed the total return of a growth index. It is for the preservation of income and capital.

The stock market crash in March 2020 serves as an example of long-term quality stock holding. Regardless of how long recoveries take, if you have stocks in companies that generate enough cash flow to cover your dividends, you can make money while you overcome volatility.

Dow Inc. DOW,
+ 3.28%
is an example of it. At the end of 2019, the stock closed at $ 54.73 and the company was paying a quarterly dividend of 70 cents per share, for a 5.12% return. As of March 23, 2020, the stock had fallen 51% to $ 26.58. The company did not cut the dividend and its quarterly free cash flow has easily covered the payment since the Covid-19 crisis began. And the stock closed at $ 60.75 on March 23, 2021.

It’s obvious the right thing to do for Dow shareholders was weathering the storm, but many investors didn’t have the stomach for it. Taking this idea further, as of the close of that dark day on March 23, 2020, the performance of Dow shares had risen to 10.5%. The market had provided patient investors with the opportunity to obtain a very high return.

All of this holds true for dividend stock ETFs, especially those with high returns.

Highest Yielding Dividend Stock ETFs

A FactSet data query turned up a list of 66 US ETFs that “weight stocks for dividends and / or seek high dividend yields.”

One advantage of ETFs is that they are easy to trade. You can buy or sell at any time when the stock market is open. Open mutual funds allow you to sell your shares to the fund company only once per day at the close of the market.

The share price of a variable capital mutual fund is its net asset value (NAV), which is the sum of the market values ​​of its assets divided by the number of shares. It is the book value of a fund.

ETFs also have NAVs, but also their own share prices, which differ from NAV. Grant wrote that when he analyzes closed funds and ETFs, he says “no thanks” if the share price is above NAV. But while some closed funds can trade at high premiums relative to NAV, most dividend stock ETFs listed here trade for small premiums or discounts.

Here are the 10 US dividend stock ETFs with the highest dividend yields as of the close of March 23:

(Set of facts)

You can see that the NAV premiums, if any, are small.

These ETFs have varied approaches, and you should visit the managers’ websites to read about the goals and management styles of anyone you consider. Some have a narrow focus, which can increase risk.

The table includes the three-month average daily trading volume. The larger your holdings, the more important liquidity will be when you try to buy or sell at the best price on any given day. The second highest performing ETF on the list, Virtus Private Credit Strategy ETF VPC,
+ 0.91%,
it has an average daily trading volume of just 9,000 shares. This means that any individual investor’s trades have a gross effect on the price flow for that day.

Regardless of liquidity, use limit orders for your trades. They don’t cost more and can save you from temporary price distortions.

The Virtus ETF Annual Expense Ratio may seem alarmingly high at 5.53%. However, this is another area where investors need to take a second look. The fund invests in business development companies and fixed capital funds, which must include their own interest expense (as they are leveraged) as part of their management fees. The annual management fee for the Virtus Private Credit Strategy ETF is 0.75%, and the remainder of that 5.53% expense ratio represents the management fees of the BDCs and closed funds you own.

The Invesco KBW High Dividend Yield Financial KBWD ETF,
+ 1.46%
It has the third highest dividend yield on the list and the second highest expense ratio at 1.24%.

However, FactSet has this to say: “The staggering fund fee is a regulatory illusion. You are required to report the operating expenses of your private equity holdings as part of your expense ratio. Maintenance costs in the real world have been consistently in line with KBWD’s very reasonable administration fee ”of 0.35%. The ETF focuses on real estate investment trusts, as well as private equity funds.

The largest ETF on the list is Alerian MLP ETF AMLP,
+ 2.32%,
which invests in energy partnerships that tend to generate high dividend yields, but also complicate investor tax filing. The ETF avoids the tax complication. But its space has been extremely volatile. AMLP’s share price has suffered for some time. So far in 2021, the stock is up 14%.

The ETF listed with the second highest trading volume was the SPDR Portfolio S&P 500 High Dividend ETF SPYD,
+ 1.41%.
It follows what FactSet calls “a sensible approach to high performance in the US large-cap space.” SPYD takes equally weighted positions in the 80 stocks among the S&P 500 with the highest dividend yields. It rebalances monthly and has the lowest expenses of any ETF on the list. Its 4.99% yield compares to a 1.48% dividend yield for the entire S&P 500.

While it’s important to emphasize, again, that income is the primary goal here, total returns (with dividends reinvested) can make useful long-term performance comparisons.

The group’s total returns and average annual returns for three, five, and ten years are shown below.

(Set of facts)

The SPDR Portfolio S&P 500 High Dividend ETF has had the best returns for three and five years, while the Invesco KBW High Dividend Yield Financial ETF takes the prize among the three that have been around for 10 years.

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