Consider these high-yield ETFs for long-term income potential.
Many investors are interested in high-yield exchange-traded funds, but just like individual high-yield dividend stocks, these investments require a discerning eye. On one hand, high-yield ETFs that deliver big, regular payments can be enticing because of the idea that you don’t have to rely on share price appreciation to drive performance and a steady stream of income could help folks in retirement pay their regular bills. However, there are no guarantees that high-yield ETFs will see stable share prices — or that these distributions are sustainable for the long term. It’s important, then, to pop the hood and make sure to examine how a high-yield ETF balances its risks with the promise of potential rewards via generous income. The following seven high-yield ETFs offer different approaches, and one might be right for you.
Global X SuperDividend ETF (ticker: SDIV)
Starting with a straightforward high-yield ETF — this Global X fund is built by investing in roughly 100 of the highest-dividend-yielding equity securities in the world. In addition to a tremendous yield, SDIV also makes its payments once every month for a regular stream of paydays. Just beware that the wide net cast by this Global X fund means you’re not getting some of the popular blue-chip stocks you may be most familiar with. In fact, less than 30% of assets are in the U.S., and top holdings include a mishmash of lesser-known stocks like Israel’s Electra Consumer Products or China’s Yanzhou Coal Mining. The yield is undeniably high, but clearly there’s also a higher risk profile for these stocks than established U.S. companies.
Current yield: 6.63%
SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
If you want higher yield but are mainly interested in exposure to large-cap U.S. stocks, then this SPDR fund is a better match. This high-yield ETF is benchmarked to the S&P 500 index of the largest U.S. companies, and then it takes roughly the top 20% or so from that batch after sorting for the highest dividend yield. The fund holds about 80 stocks in its portfolio. And it, too, relies on lesser-known companies, including insurer Lincoln National Corp. (LNC) and oil refiner Valero Energy Corp. (VLO) instead of big-name blue chips. However, these slow and steady domestic stocks still have lower relative risk when compared with the foreign stocks that make up SDIV.
Current yield: 4.66%
Vanguard Real Estate ETF (VNQ)
Just as some stocks can yield more than others, some sectors are naturally positioned for bigger income and higher yield than others. If you aren’t intimidated by leaning heavily on an income-rich sector — or if you simply are laying it on top of other dividend-generating assets in a diversified portfolio — then VNQ is worth a look. The bottom line is that the nature of real estate lends itself generally to dividends thanks to regular rent checks from tenants, but the unique tax-sheltered nature of real estate investment trusts, or REITs, means that this special class of stock must deliver 90% of taxable income back to shareholders. With about 175 stocks, VNQ holdings include telecom tower operator American Tower Corp. (AMT), warehouse giant Prologis (PLD) and mall giant Simon Property Group (SPG) as examples of the fund’s makeup.
Current yield: 3.24%
Alerian MLP ETF (AMLP)
Real estate is a good sector to look for yield, but don’t forget energy — or, more particularly, the subsector of “midstream” energy that involves storage tank operators, pipeline companies and other corporations that support explorers bringing their fossil fuels to the market. This kind of business is much more reliable as it’s not as exposed to fluctuations in crude oil or natural gas. The practical reality is that when a company is storing a million barrels of crude, it takes up the same space regardless of whether the market price is $35 or $65 per barrel. The margins are admittedly lower, but these midstream operations are typically organized as master limited partnerships, or MLPs. The word “partnership” is key, as it means a mandate for profit-sharing and big dividends for shareholders. AMLP is one of the biggest funds to play this corner of the stock market, with nearly $6 billion in assets. Keep in mind that it comes with a higher expense ratio of 0.9%, or $90 for every $10,000 invested.
Current yield: 8.84%
Global X U.S. Preferred ETF (PFFD)
One other way to tap into big income potential from the stock market is via “preferred” stocks. This asset is a hybrid between stocks and bonds, with more price stability than traditional common stock but less chance to pay you through share appreciation. However, preferred stocks tend to offer far higher yields than corporate bonds from the same entity or their dividends to common stock holders. Just be aware that this kind of special stock is normally issued by very large companies in capital-intensive sectors like energy or finance. As a result, PFFD’s top positions include megabanks such as Wells Fargo & Co. (WFC) and Bank of America Corp. (BAC), so be aware you’ll likely be biased away from growth-oriented consumer or technology stocks in this high-yield ETF.
Current yield: 5.15%
iShares Broad USD High Yield Corporate Bond ETF (USHY)
When many investors look for income-oriented strategies, they gravitate toward bonds. The problem with that lately is that a low interest rate environment has depressed yields in this asset class. Consider that the 10-year U.S. Treasury note yields a meager 1.67%. If you want high-yield investments, then, investors need to look beyond these long-term government bonds and take on a bit more risk via loans to less stable corporations — or “junk” bonds, as they are normally called, because they are extended to firms with less-than-stellar credit ratings. Think companies like second-tier telecom T-Mobile US (TMUS) or embattled cruise operator Carnival Corp. (CCL). With more than 2,000 total holdings, the lineup of individual bonds is very diverse to help avoid trouble if a small group of companies run into a snag at the same time. However, it’s undeniable that any broad downturn will hurt these subpar companies more than their peers — so investors should be aware of the risk.
Current yield: 5.24%
VanEck Vectors High Yield Muni ETF (HYD)
If you like the bond market but you’re not as attracted to the admittedly troubled stocks in the junk bond arena, then take a look at HYD. This bond fund is focused only on local government debt, with a strategy to track high-yield, long-term municipal bonds — and in most cases, it can offer tax-free income thanks to the unique treatment of this asset class. Sure, local governments are not as secure as the massive U.S. Treasury Department, but they still have the power to tax to cover any potential shortfalls. And while this fund expressly seeks out the less credit-worthy municipalities in states like Florida and Ohio, as well as the U.S. territory of Puerto Rico, the vast majority of research hints that “munis” are still safer than corporate bonds; specifically, only about 0.08% of municipal bond offerings ever end up in default, according to ETF.com. That means you can get a bit better yield without taking on the pure risk of junk bonds in embattled for-profit corporations.
Current yield: 3.83%
Seven high-yield ETFs for income-oriented investors:
— Global X SuperDividend ETF (SDIV)
— SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
— Vanguard Real Estate ETF (VNQ)
— Alerian MLP ETF (AMLP)
— Global X U.S. Preferred ETF (PFFD)
— iShares Broad USD High Yield Corporate Bond ETF (USHY)
— VanEck Vectors High Yield Muni ETF (HYD)
