Investors have enjoyed the bull market that has been 2012, as a number of asset classes have experienced marked gains. But many are also aware that the growth in major equity benchmarks could come to a screeching halt at any time, especially if (and when) euro zone fears spark up again. To protect their portfolios against unpredictable markets, many investors have turned to income investing over the past few years, using dividends to procure the majority of their gains. But finding strong yields in an environment with record-low interest rates can be a tall order.
Many investors feel that dividend-paying firms present strong plays because a cash payout to shareholders is typically a sign of a strong company; all of the crafty accounting techniques in the world couldn’t fake a dividend payout and many feel that these distributions comment on the overall health of a firm. For those seeking to add a healthy dividend stream to their portfolio, we outline five ETFs that are currently paying out massive yields (note that this list excludes leveraged products) [see also Five Commodity MLPs With Sky High Yields].
5. SuperDividend ETF (SDIV)
This fund, from Global X, debuted midway through last year and quickly made a name for itself in the exchange traded world. SDIV tracks an index which equally weights roughly 100 of the highest pay dividend securities in the world. As such, the fund favors international equities and is mostly composed of mid cap firms. Currently, SDIV is paying out a 30 Day SEC Yield of 7.95% on top of its gains of 10.5% on the year. It should be noted that SDIV favors the real-estate sector which has been relatively volatile in recent years [see also The Appeal Of Dividend ETFs].
4. CEF Income Composite Portfolio (PCEF)
This ETF tracks an index which invests in closed-end funds in the US. It allows investors to invest in funds that may otherwise be difficult to access, which has drawn a lot of attention from investors. It is important to remember that PCEF invests in funds listed in the U.S., but the exposure of said funds often reaches across the world, so PCEF is by no means a pure play on the local economy. PCEF is currently paying out a yield of 8.04% but has struggled to maintain its ground in recent weeks.
3. KBW High Dividend Yield Financial Portfolio (KBWD)
KBWD replicates a benchmark that chooses from a handful of financial companies domiciled in the US. The resulting exposure makes the fund a bit risky in our current environment, but for those who believe that we will continue to march forward, financials may be the perfect place to invest. A closer look underneath the hood reveals that the fund is very REIT-heavy, which may be an issue for some, although REITs are known for their massive yields. With a portfolio filled with REITs, a fair amount of KBWD’s exposure technically falls under the real estate sector despite also being considered financial firms by the index. The ETF currently has an SEC yield of 9.47% and has jumped by more than 12% on the year [see also Why Some Dividend ETFs Have Puny Dividend Yields].
2. Peritus High Yield ETF (HYLD)
This fund shakes things up a bit, as it is an actively managed fund that focuses on the fixed income space. HYLD is a different kind of active fund, as it prides itself on unprecedented transparency; its holdings are updated live on its Web site on a daily basis, allowing investors to know exactly what they are investing in. For those who are weary of debt markets, this fund probably isn’t for you; but if you are comfortable with fixed income, this ETF might be worth a closer look as it features a solid track record and is currently paying out a yield of 9.82% [see also High Yield ETFdb Portfolio].
1. FTSE NAREIT Mortgage REITs Index Fund (REM)
For those comfortable with REITs, this fund is one of the top dogs in the ETF industry. REM invests in REITs domiciled in the U.S., an important distinction given the major differences in real estate markets on a country-to-country basis. For now, domestic housing markets are still in the doldrums, so REM may be too risky for some, but note that REM is well off its pre-recession highs, so a recovery in the housing market would bode well for this fund. REM is currently paying out an SEC yield of 12.25% and has jumped by nearly 10% year to date [see also The Best Dividend ETFs Aren’t Dividend ETFs At All].
Caution: Not All That Glitters Is Gold
When it comes to ETFs, seeing a massive yield doesn’t always indicate a strong dividend payer. Often times a high yield can be the result of capital gains incurred, in which issuers will pay out a higher dividend to cover the capital gains for investors. A prime example comes from the Dreyfus Brazilian Real Fund (BZF). Technically, the fund payed out a jaw-dropping dividend of roughly 27% in 2011, but all of that was due to capital gains, so the effective dividend on the year was 0%. It is always important to look under the hood of a dividend ETF to ensure that you are actually receiving the payout you see advertised.
Disclosure: Long REM.