Dividend ETFs Offer High Yields
A question from JT in the mailbag last week sparked interest, asking if there are any ETFs or mutual funds with a dividend investing philosophy similar to the one described. The writer tends to use funds when they allow investment in something difficult or cumbersome, such as an ETF used to gain exposure to the lithium and battery industry, which resulted in a total return of 56%.
The writer’s strategy is based on three types of dividend stocks split into two portfolios: the Core portfolio and the Opportunity portfolio. The Core portfolio is made up of Income Generators and Wealth Builders, which are stocks planned to be held for years or decades. The Opportunity portfolio is more speculative, with stocks that have a specific catalyst for growth and pay out a dividend.
Dividend ETFs
The Schwab U.S. Dividend Equity ETF (SCHD) is the biggest and most popular dividend ETF, with over $20 billion in inflows this year and total assets of $113 billion. However, its goal is to track the Dow Jones U.S. Dividend 100 Index, which measures the performance of 100 high-dividend-yielding US stocks. The writer looks for specific things in a fund, starting with its objective and top holdings.
The top holdings of SCHD include big-name companies like Qualcomm and Texas Instruments, but the writer notes that some of these companies don’t pay very high dividends, with annual yields of just 1.9% and 2.1%, respectively. The fund’s trailing twelve-month dividend yield is just 3%, which is not enough yield when short-term Treasuries are offering around 5%.
The writer decided to search for high-yield dividend ETFs, skipping income ETFs that use an options strategy. One option is the Global X SuperDividend U.S. ETF (DIV), which invests in 40 of the highest dividend-paying equities in the US and has made monthly distributions for the last 13 years, with an annualized yield of 6.6% at current prices.
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The writer notes that using a fund is a great way to get exposure to MLPs’ above-average yields without the tax reporting headache.
To match the writer’s strategy, one would have to invest in several ETFs. However, both AMLP and DIV are solid ways to add dividends to a portfolio. Before adding any fund, it’s essential to review its objective, top holdings, and expense ratio.
The writer’s search for dividend ETFs led to a closer look at the holdings and yields of these funds. For example, the Global X SuperDividend U.S. ETF (DIV) has a low expense ratio of just 0.45% and is trading at exactly its NAV (net asset value). This information is important in making an informed decision about which ETFs to invest in.
The Alerian MLP ETF (AMLP) also offers an attractive yield, with its latest payment of $1.03 being an annualized 7.7% yield at recent prices. The operating expenses for the fund are about 1%, and it currently trades right around its NAV. These details are essential in evaluating the potential of these ETFs.
key considerations when evaluating these etfs
When evaluating these ETFs, it’s essential to consider their expense ratios and trading prices.
