By now, you probably know about the advantages of using exchange-traded-funds (ETFs) to hop on and off market sector swings. But you might be surprised to learn than many ETFs pay significant dividend yields (next 12-month’s dividends divided by the price you pay for the shares).
For instance, more than 100 ETFs are paying at least 3% yields and more than 20 are paying 5% or higher. In fact, four are paying at least 8%. Here’s a rundown on the top five yielding exchange-traded-funds.
iShares Mortgage Plus (REM) 9.6%
The iShares NAREIT Mortgage Plus Capped Index Fund tracks an index that, in theory, measures the performance of the residential and commercial real estate, mortgage finance, and savings associations sectors of the U.S. stock market. However, when I checked, five of the fund’s top ten holdings were mortgage REITS (a special type of real estate investment trust that invests in mortgages backed by real estate). The remaining five were relatively small banks.
Mortgage REITs typically pay double-digit dividend yields compared to 4% to 5% for the small banks. For reasons that I don’t have room to go into here, even with the weak housing market, mortgage REITs are not particularly risky stocks. However, the fund’s index can be rebalanced quarterly. Its sky-high dividend yield would drop if, at some point, the fund deemphasizes the mortgage REITs.
SPDR Intl. Real Estate (RWX) 8.5%
The SPDR Dow Jones International Real Estate Fund tracks an index that measures the performance of publicly traded real estate operators outside the U.S., both in developed and emerging markets. Its biggest holding is Westfield Group, a Australian-based shopping mall operating with assets in the U.S., the United Kingdom, New Zealand, as well as in Australia. Its next biggest holding is Unibail-Romeco, a Paris-based shopping mall operator with operations in several European countries besides France.
CEF Income (PCEF) 7.9%
CEF Income Composite Portfolio tracks the performance of an index of closed-end funds. Closed-end funds are a special type of mutual fund that only sell shares during their IPOs (initial public offerings). After that, the shares trade between buyers and sellers on the open market just like stocks.
Closed-end fund managers can implement long-term strategies because, unlike conventional mutual fund managers, they don’t have to worry about selling holdings to redeem fund shares when fund holders sell, or investing new cash when holders add to positions.
The CEF’s index is reconstituted quarterly, using a quantitative formula to create a new portfolio of 115 or so funds drawn from a universe of 350 closed-end funds.
iShares High Yield (HYG) 7.9%
iShares iBoxx High Yield Corporate tracks an index of below investment grade (junk) bonds mostly issued by U.S.-based corporations. The risk of owning junk-rated corporate bonds depends on the state of the overall corporate credit markets. For instance, junk bonds were very risky in 2008/2009, when credit was tight and many corporations were teetering. Now the opposite is true. Most publicly traded corporations, already flush with cash, can easily raise more either by selling new shares or by borrowing.
iShares U.S. Preferreds (PFF) 7.2%
iShares S&P U.S. Preferred Stock Index tracks an index of preferred stocks listed on major U.S. exchanges. Corporations sell preferred shares to raise cash, much the same as bonds. Most preferreds are rated by major credit agencies and roughly 80% of the fund’s holdings are rated investment quality. Preferreds, although similar to bonds, are riskier. Unlike bonds, a company can suspend paying preferred dividends without filing for bankruptcy.
You can see a list of all 400 or so dividend paying ETFs on my Dividend Detective site (www.dividenddetective.com), nicely sorted with the highest payers at the top. As is the case for all such lists, do your due diligence. The more you know about your investments, the better your results.