Federal Reserve Chairman Jerome Powell said this week that the central bank “will give the economy the support it needs as long as it needs it.”
This means that low interest rates are likely to persist, keeping a lid on income-generating investments.
One way to move forward is with dividend shares and the exchange traded funds that hold them. Below is a list of US ETFs with the highest dividend yields – ranging from 4.9% to 9.8%.
Mark Grant, B. Riley Financial’s chief global fixed income strategist, wrote in his March 22 e-mail “Out of the Box” that with inflation at 1.68% last month, “you have to beat this rate for get any kind of “real return” or just play “mahjong” with inflation and the Federal Reserve.
With prohibitively low bond yields, he is in favor of closed-end funds and exchange traded funds to meet this income target. He warned that investors must 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 for growth and investing for income. The objective of an income portfolio is not to exceed the total return of a growth index. It is for the preservation of income and capital.
The collapse of the stock market in March 2020 serves as an example of maintaining long-term quality stocks. No matter how long the recoveries last, if you own shares of companies that generate enough cash flow to cover their dividends, you can make money while eliminating volatility.
Dow Inc. DOW,
is an example. At the end of 2019, the shares closed at 54.73 USD, and the company paid a quarterly dividend of 70 cents per share, for a yield of 5.12%. By March 23, 2020, shares had fallen 51% to $ 26.58. The company did not reduce the dividend and its free quarterly cash flow easily covered the payment since the beginning 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 get out of the storm, but many investors didn’t have the stomach for it. Taking this idea further, at the end of that dark day of March 23, 2020, the return on Dow shares rose to 10.5%. The market has offered patient investors the opportunity to block a very high return.
All this applies to dividend ETFs, especially high yields.
ETFs with the highest yield dividends
A FactSet data query gave a list of 66 US ETFs that “weight shares by dividends and / or look for 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. Mutual funds allow you to resell the fund company’s shares only once a day when the market closes.
The share price of an open-end mutual fund is the net asset value (NAV), which is the sum of the market values of its assets divided by the number of shares. It is the carrying amount of a fund.
ETFs also have NAVs, but also their own share prices that differ from NAVs. Grant wrote that when analyzing closed-end funds and ETFs, he says “no thanks” if the share price is higher than NAV. But while some closed-end funds may trade at large premiums on NAVs, most dividend ETFs listed here trade for small premiums or discounts.
Here are the top 10 dividend stock ETFs with the highest dividend yields since March 23 closed:
(FactSet)
You can see that the premiums for NAV, if any, are small.
These ETFs have a variety of approaches and you should visit the managers’ websites to read about the goals and management styles of anyone you consider. Some are narrowly concentrated, which can increase the risk.
The table includes the average daily trading volume over three months. The higher the holdings, the more important liquidity becomes when you try to buy or sell at the best price in a given day. The second highest yielding ETF on the list, the Virtus Private Strategy Strategy VPC ETF,
has an average daily trading volume of only 9,000 shares. This means that transactions made by any individual investor have a gross effect on the price flow that day.
Regardless of liquidity, use limit orders for your transactions. They don’t cost extra and can save you from temporary price distortions.
Virtus ETF’s annual expense ratio could seem alarmingly high at 5.53%. However, this is another area where investors need to take a fresh look. The fund invests in business development companies and closed-end funds, which must include their own interest expenses (because they are leveraged) as part of their management fees. The annual management fee for the Virtus Private Credit Strategy ETF is 0.75%, and the remaining 5.53% of this expense ratio represents the management fees of the BDCs and closed-end funds it holds.
Invesco KBW High Dividend Yield Financial Financial ETF,
has the third highest dividend yield on the list and the second highest expense ratio, at 1.24%.
However, FactSet has this to say: “The fund’s eye tax is a regulatory illusion. It is obliged to report the operating expenses of its private equity stakes as part of its expense report. Actual holding costs were consistently in line with KBWD’s very reasonable management fee of 0.35%. ETFs focus on real estate investment trusts as well as private equity funds.
The largest ETF on the list is Alerian MLP ETF AMLP,
which invests in energy partnerships that tend to have high dividend yields, but which also complicates investors’ tax deposits. ETFs avoid tax complications. But its space was extremely volatile. The price of AMLP’s stock has been suffering for some time. So far, in 2021, shares have increased by 14%.
The ETF listed with the second largest trading volume was the SPDR S&P 500 High Dividend ETF SPYD portfolio,
What follows is what FactSet calls “a meaningless approach to high-yielding high-capitalization in the United States.” SPYD takes an equally weighted position in the 80 shares of the S&P 500 with the highest dividend yields. It rebalances monthly and has the lowest expenditure of any ETF on the list. Its 4.99% yield compares to a dividend yield of 1.48% for the entire S&P 500.
Although it is important to emphasize, again, that income is the main goal here, total returns (with reinvested dividends) can make useful comparisons of long-term performance.
Here are the total results and average annual returns for the group for three, five and 10 years.
(FactSet)
The SPDR S&P 500 High Dividend ETF portfolio had the best yields of three and five years, while the Invesco KBW High Dividend Yield Financial ETF received the award of the three that have existed for 10 years.