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.”
This means that low interest rates are likely to persist, preventing income-generating investments.
One way to make progress is with dividend stocks and the exchange-traded funds that hold them. Below is a list of US ETFs with the highest dividend yields – they range from 4.9% to 9.8%.
Mark Grant, B. Riley Financial’s global chief fixed income strategist, wrote in his e-mail “Out of the Box” on March 22 that, with 1.68% inflation 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 bond yields prohibitively low, he favors closed-end funds and exchange-traded funds to achieve this income objective. He warned that investors should do their homework to select the right ones.
ETFs are easier to analyze than closed-end funds, especially ETFs with diversified portfolios.
Focusing on income, not growth
There is a difference between investing to grow and investing to earn income. The purpose of an income portfolio is not to beat the total return on a growth index. It is for the preservation of income and capital.
The stock market crash in March 2020 serves as an example of maintaining quality stocks in the long run. Regardless of how long the recoveries take, if you own shares in companies that generate enough cash flow to cover your dividends, you can make money while getting rid of volatility.
Dow Inc. DOW,
it is a case in point. At the end of 2019, the stock closed at $ 54.73 and the company was paying a quarterly dividend of 70 cents per share, with a yield of 5.12%. As of March 23, 2020, the stock had fallen 51% to $ 26.58. The company did not cut dividends and its quarterly free cash flow easily covered the payment since the start of the Covid-19 crisis. And the stock closed at $ 60.75 on March 23, 2021.
Obviously, the right thing for Dow shareholders was to weather the storm, but many investors didn’t have the stomach for it. Taking that idea further, at the close of that gloomy day of March 23, 2020, the yield on Dow’s shares had risen to 10.5%. The market gave patient investors the opportunity to earn a very high return.
All of this is true for dividend stock ETFs, especially those with high yields.
Stock ETFs with higher dividend yields
A query of FactSet data resulted in a list of 66 US ETFs that “weigh shares for dividends and / or seek high dividend yields”.
An 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 back to the fund company only once a day at the close of the market.
The price of shares in an open 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 stock prices that differ from NAV. Grant wrote that when analyzing closed-end funds and ETFs, he says “no thanks” if the stock price is a premium for NAV. But while some closed-end funds can trade with high NAV premiums, most dividend equity ETFs listed here are traded with small premiums or discounts.
Here are the top 10 US dividend stock ETFs with the highest dividend yields at the close of March 23:
(FactSet)
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 management goals and styles of anyone you consider. Some have a narrow focus, which can increase risk.
The table includes the average daily trading volume of three months. The larger your portfolio, the more important liquidity becomes when you try to buy or sell at the best price on a given day. The second highest yielding ETF on the list, Virtus Private Credit Strategy ETF VPC,
has an average daily trading volume of just 9,000 shares. This means that any individual investor’s trades have a crude effect on that day’s price flow.
Regardless of liquidity, use limited orders for your trades. They have no extra cost and can avoid temporary price distortions.
The annual spending rate of Virtus ETF can appear 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 closed-end funds, which must include their own interest expenses (since they are leveraged) as part of their management fees. The annual management fee of the ETF Virtus Private Credit Strategy is 0.75%, and the remainder of this expense ratio of 5.53% represents the management fees of the BDCs and closed-end funds it holds.
Invesco KBW High Dividend Yield Financial ETF KBWD,
has the third highest dividend yield on the list and the second highest expense ratio at 1.24%.
However, FactSet has the following: “The fund’s impressive rate is a regulatory illusion. It is necessary 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 management fee of 0.35%. The ETF focuses on real estate investment funds, as well as private equity funds.
The biggest ETF on the list is the Alerian MLP ETF AMLP,
which invests in energy partnerships that tend to have high dividend yields, but also make investor tax filings more complicated. The ETF avoids tax complications. But its space has been extremely volatile. The AMLP stock price has suffered for some time. So far, in 2021, stocks have risen 14%.
The ETF listed with the second highest trading volume was the SPDR Portfolio S&P 500 High Dividend ETF SPYD,
He follows what FactSet calls “a practical approach to high yield in the US capitalization space”. SPYD assumes equally weighted positions in the 80 shares among the S&P 500 with the highest dividend yields. It is rebalanced 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 is important to emphasize, again, that revenue is the primary objective here, total returns (with dividends reinvested) can be useful for long-term performance comparisons.
Here are the total returns and the average annual returns for the group for three, five and 10 years.
(FactSet)
The SPDR Portfolio S&P 500 High Dividend ETF has had the best returns in three and five years, while Invesco KBW High Dividend Yield Financial ETF takes the prize among the three that have existed for 10 years.