Today’s market environment has created a hazy outlook for equities as major equities have fallen into an unstable trend for much of 2011. While some remain bullish on the economic recovery, others feel that recent statistics point the other way, and that we are heading for a slowdown. As such, many investors have varying opinions as to where their assets would be best placed as there are numerous strategies to create income in a shaky environment. But one of the simplest, and most effective, ways to ensure steady income in your portfolio is to search for high and stable dividend yields.
At first glance, it can be easy to overlook dividend yields when making investment decisions. For example, seeing a 2% yield on a fund may seem minuscule, but consider this; a portfolio with a baseline investment of $100,000, earning an average 2% annually off of dividends will appreciate to approximately $122,000 in 10 years, and nearly $150,000 in 20 years, assuming the gains are re-invested and no appreciation in stock price. In fact, a recent study conducted by Standard & Poor’s revealed that dividend components were responsible for 44% of the total return in the last 80 years of the S&P 500′s history. From 1950 until 2010, an investment of one dollar with dividends and reinvestment would have performed eight times better than a dollar invested in a non-dividend fund; that dividend invested dollar would be worth roughly $500 today [see also Examining International Dividend ETFs].
Dividends are also used in a number of other different ways, including as a partial hedge against bear markets and as a buffer against inflation as well. Steady income ensures that even in a falling market, the investor will still be generating cash based on their holdings’ payouts. As for inflation, dividend yields have a tendency to rise in inflationary environments, alleviating those who are concerned for their yields in this type of economy. Lastly, dividend paying companies tend to be in good health; while many firms can cook the books to appear stable, nothing says business is going well quite like a cold hard cash payment to all of your investors [see also Details Of Dividend ETFs: Consistency vs. Yield].
The ETF world’s rapid growth has led to a number of high-yielding options available to investors. But for some, staying away from U.S. investments for the time being is key; as the massive debt and economic instability seems to be pointing towards a bumpy road in the short term for both the U.S. stock market and the American currency. Below, we outline five high-yielding ETFs that shy away from U.S. exposure to give investors the juicy income they seek in their portfolios:
Emerging Markets Equity Income Fund (DEM)
This ETF tracks a fundamentally weighted index that measures the performance of the highest dividend yielding stocks selected from the WisdomTree Emerging Markets Dividend Index. A closer look into the holdings reveals that DEM overweights the financials (26.9%) and telecom (12.7%) sectors. It should also be noted that the fund gives significant weighting to companies ranging from small to giant cap, giving investors a good level of diversity when it comes to the individual holdings. From a country standpoint, DEM allocates to numerous big name emerging markets, with Taiwan, Brazil, and Malaysia being just of few of the nations to appear in that list [see also Emerging Market ETFs: Alternative Weighting Edition].
The fund has a current 30 Day SEC-Yield of 4.69%, giving investors a stable income to add to their holdings. But beware the risks that an emerging market product holds; they are subject to major swings and can be heavily impacted by global trends. Another major issue for emerging markets is inflation, the result of which has caused many funds, namely India products, to suffer harsh losses on the year. Thus far in 2011, DEM has outperformed a number of emerging market products by posting gains of 4% since the start of January.
MSCI Pacific Ex-Japan Index Fund (EPP)
EPP seeks to replicate a benchmark that measures the performance of the Australian, Hong Kong, New Zealand, and Singapore equity markets. Though the fund has a tilt toward financial services, its 155 holdings and nice spread across numerous sectors give it a healthy diversity for investors looking to mitigate their risks from a geographic perspective. The individual holdings, the majority of which are giant and large cap, include multinational names like BHP Billiton and Rio Tinto, two of the largest mining companies in the world. It should be noted, however, that this fund favors Australia (64.6%) in its holdings with New Zealand not even accounting for 1% of the entire fund.
This ETF has a current 30 Day SEC-Yield of 3.35%, which may add a nice predictable dividend stream to your holdings. EPP is a relatively stable fund, gaining around 3% on the year, and while it may not have hefty growth prospects like DEM, it will be a nice addition for investors looking for yield without having to worry about a fund’s performance on a day-to-day basis.
SPDR DJ Euro STOXX 50 ETF (FEZ)
This ETF tracks the Dow Jones EURO STOXX 50 Index, which represents a large majority of the free-float market capitalization of the investable universe in the Eurozone. Like many international products, FEZ favors financials (26.5%) but it spreads its remaining assets across numerous sectors to give a nice balance to the holdings. The fund consists of many bellwether European firms like Total SA, Siemens, and BNP Paribas to name a few. From a country perspective, FEZ allocates its assets as follows: France (35.7%), Germany (30.6%), Spain (13.2%), and Italy (9.3%) among several other smaller allocations.
Though many investors are weary of the euro-zone this year, as numerous debt-crises have threatened their currency as well as individual countries, FEZ has weathered the storm quite well. In 2011, this product hauled in gains of 5.3% while paying out a dividend yield of 3.9%. This ETF will provide a healthy income stream, but for the time being it may be too risky for some investors to purchase, as evidenced by its near 8.6% loss through the first 27 days of July. For those who believe in this fund’s strategy, now may be a good time to buy in cheap, but others may want to avoid the euro-zone entirely until it shows more stability.
Market Vectors Emerging Markets Local Currency Bond ETF (EMLC)
For investors who would prefer their yield via a fixed income structure, EMLC presents a strong ex-U.S. play. This fund is designed to track a basket of bonds issued in local currencies by emerging market governments, giving it a very unique risk/return profile. The fund features a fair amount of investment-grade debt from major emerging nations like Brazil, Russia, Malaysia, Indonesia, and Chile. The individual debts hold maturities ranging anywhere from 1 to 10 years, giving the fund a good spread between short and mid-term bonds. It is also important to note that 45.6% of the fund comes from investment grade debts, but 43.9% of EMLC’s bonds are unrated, putting the fund at a relatively high risk for credit defaults.
EMLC is currently paying out a robust SEC yield of 6.1%, boosted by gains of 6.7% in 2011. But investors should keep in mind that this high yield figure comes from risky holdings. Similar to DEM, EMLC will be much more susceptible to market swings and global trends than a large cap product, and may be too volatile for some investors. For those who can stomach the risk, and buy into this ETF’s strategy, this product will make a good monthly income stream while shying away from U.S. exposure [see also One Year Later: EMLC Comes Through For Yield Hungry Investors].
S&P/Citi 1-3 Year International Treasury Bond (ISHG)
ISHG is another fixed income product that could provide solid yields to investors. The difference is that ISHG is designed to measure the performance of treasury bonds issued in local currencies by developed market countries outside the U.S. with a remaining maturity between one and three years. For investors looking for a more stable bond ETF, ISHG may present itself as a strong option, as nearly all of its individual holdings are rated investment-grade. Its debts come from a wide variety of countries around the world, including Japan (24.2%), Germany (8.9%), and Italy (8.4%) among others. The heavy allocation to Japan may be of some concern to investors as the Japanese economy has suffered a tough 2011; it should also be noted that Greek debts, arguably some of the riskiest in today’s current environment– but also some of the highest yielding securities– account for 4.8% of this ETF [see also International Bond ETFs: Cruising Through All The Options].
While ISHG does present itself as somewhat risky product, its current SEC yield of 3.29% and a YTD return of 5.9% may change the minds of investors on the fence about this product’s ability to perform. With the majority of this product’s debt falling into the investment grade category, the country allocations should not be a major concern to investors seeking solid yield from around the world.
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Disclosure: Photo 2 courtesy of Jason Auch. No positions at time of writing.