Perhaps the most popular fad among investors over the past couple of years has been interest in dividend-paying stocks; with yields at record lows and risk aversion regularly spiking, portfolios have shifted towards stocks of companies known for making regular distributions of their cash flows. Not surprisingly, many investors are embracing ETFs to achieve exposure to dividend-paying stocks; the exchange-traded structure allows for cheap, low maintenance, rules-based exposure to this segment of the market.
There are more than 40 different ETFs available to U.S. investors that utilize dividends in some shape or form in developing their underlying portfolio of stocks. But not all of these funds offer up meaningful yields; many focus on dollar value or consistency of distributions, as opposed to the dividend yield individual stocks offer. As a result, many of the ETFs that include “dividend” in the name or a dividend-related screen in the underlying index don’t have very appealing payout rates [see SDIV vs. VIG: Understanding Dividend ETFs].
There are, of course, a number of exchange-traded funds that are designed to deliver hefty yields to investors–often times along with considerable amounts of risk. For those willing to take on some of those risk factors, the rewards can be substantial. Below, we outline five ETFs and ETNs that maintain massive distribution yields [for more ETF ideas, sign up for the free ETFdb newsletter]:
Global X Super Dividend ETF (SDIV)
This fund’s name says it all: the “Super” Dividend ETF currently recently boasted a juicy 8.7% 30-Day SEC yield and has accumulated over $44 million in assets since its inception in June of 2011. SDIV provides investors with exposure to the performance of 100 companies that rank among the highest dividend yielding equity securities in the world. Perhaps the most unique feature of SDIV is its weighting methodology; the underlying index is equal-weighted, meaning that no one stock accounts for a meaningful portion of total fund returns.
Although the fund’s portfolio stretches across a broad array of sectors, nearly a quarter of the holdings are allocated to real estate followed by relatively hefty allocations to communication services, financial services, and consumer cyclicals. In terms of country allocations, the majority of the holdings are U.S. and Australian companies, which account for more than half of the fund’s total assets. It is also worth noting that this ETF comes with a relatively high level of risk, since many of the companies included in the portfolio are smaller and potentially volatile stocks.
ETRACS 2x Leveraged Long Alerian MLP Infrastructure Index ETN (MLPL)
Despite being in one of the most feared and risky asset class, this leveraged ETN has attracted many investors with its impressive performance and 2x monthly amplified returns. The fund’s current annual leveraged yield is a whopping 10.7%, thanks in part to the use of leverage to magnify the yield on an underlying basket of MLPs.
MLPL is linked to an index that consists of Master Limited Partnerships (MLPs); the majority of these publicly traded limited partnerships operate in the energy infrastructure industry. Typically MLPs are companies that own and operate assets such as natural gas or crude oil pipelines and historically have provided relatively high dividend yields. Since this ETN’s leverage is reset on a monthly basis, it will operate in a very different manner from leveraged ETPs that reset daily.
ETRACS 2x Leveraged Long Wells Fargo Business Development Company ETN (BDCL)
This ETN offers investors a unique way to tap into the universe of private equity investments, specifically Business Developement Companies (BDCs). BDCL offers exposure to this previously difficult-to-reach corner of the financial market, while also generating a potentially handsome dividend yield. Since its inception in May of 2011, this leveraged fund has accumulated over $37 in assets and currently features an annual leveraged yield of nearly 19%.
The hefty payout potential is partially a result of some favorable tax treatments for the underlying securities; BDCs can avoid many corporate taxes as long as they pay out at least 90% of their profit and capital gains as taxable dividends. Like all leveraged products, BDCL holds a relatively high level of risk since it has the potential to amplify both returns and losses. Another note worth mentioning is the fund’s structure: ETNs are subject to the credit risk of the issuing firm, but unlike their ETF counterparts, they do not exhibit tracking error.
PowerShares KBW High Dividend Yield Financial Portfolio (KBWD)
Financial equities are often a heavy allocation in most dividend-focused funds, as banks and similar institutions are generally a source of stable distributions. KBWD, however, has proven to be a powerhouse in its category, currently delivering an eye-popping 12 month yield of more than 10%. Despite this attractive yield, investors should be aware of this relatively risky fund as its portfolio includes some of the less stable financial institutions that aren’t necessarily on strong fiscal footing.
KBWD is linked to a dividend yield weighted index that is designed to track the performance of approximately 24 to 40 publicly listed financial companies. In terms of specific sub-industry breakdown, almost half of the fund’s assets are allocated to mortgage REITs companies, followed by hefty allocations to regional banks, and asset management & custody banks.
iShares FTSE NAREIT Mortgage REITs Index (REM)
REM taps into the intriguing and potentially lucrative world of the U.S. equity market: REITs. Understandably, most investors have been leery of this particular sector since the collapse of residential and commercial real estate markets in 2008, which resulted in many REIT funds loosing hefty chunks of their profits. With broad real estate markets sitting at a low point, REM has been handsomely compensating investors for low prices by beefing up distribution yields; currently, REM offers a juicy 12-month yield of about 11%.
Disclosure: No positions at time of writing.
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