Published Mon, 20 Jul 2020 11:30:24 on Income Investors
The Best High-Dividend ETFs for August 2020
I know from speaking with hundreds of individual investors that most all of them are worried about low yields.
In a bid to prop up the economy, the Federal Reserve has slashed interest rates down to zero percent. From time to time, yields on U.S. Treasury bills have even gone negative!
Bad news for savers. Today, even a six-figure nest egg won’t generate much in the way of income. And for many, that means working for a few more years or maybe giving up on retirement altogether.
But one investment niche could provide an answer: high-dividend exchange-traded funds (ETFs).
ETFs own collections of investments, such as stocks, bonds, commodities, etc. Like mutual funds, they allow investors to pool their money together. But unlike mutual funds, which only trade at the end of the day, ETFs trade on public exchanges just like ordinary stocks.
The big benefit of these investment pools is diversification. High-dividend ETFs can own hundreds of different securities. So in one shot, you can build a diversified portfolio of income-producing investments.
Furthermore, high-dividend ETFs often have lower fees than their mutual fund cousins. It’s not uncommon to see ETFs with management expense ratios as low as 0.1% or even 0.05%. Over the long run, that can have a dramatic impact in your investment returns.
And the best part?
The recent COVID-19 slump has turned some of these high-dividend ETFs into veritable cash cows. I’ve highlighted five of my favorites in the table below.
The 5 Best High-Dividend ETFs
iShares Mortgage Real Estate Capped ETF
VanEck Vectors Mortgage REIT Income ETF
VanEck Vectors BDC Income ETF
Alerian MLP ETF
ProShares S&P 500 Dividend Aristocrats ETF
(Source: Yahoo! Finance, last accessed July 16, 2020.)
Let’s say a few words about these high-dividend ETFs.
iShares Mortgage Real Estate Capped ETF (BATS:REM) and VanEck Vectors Mortgage REIT Income ETF (NYSE: MORT) invest in one of my favorite niches: mortgage real estate investment trusts (mREITs). These partnerships, which I’ve nicknamed “Alternative Banks,” work like traditional financial institutions. They take in money from depositors and lend out the proceeds to homeowners. Their profit, called the spread, comes from the difference between what these firms earn in interest and what they pay out to creditors.
But unlike traditional banks, Alternative Banks have no ATMs, branches, or tellers. This minimal overhead means almost every dollar of net interest income flows straight to the bottom line, which eventually gets paid out to unitholders. As a result, it’s not uncommon to see some mREITs paying yields as high as 12%, 15%, or even 21%.
VanEck Vectors BDC Income ETF (NYSE: BIZD) owns a collection of unique firms called business development corporations (BDCs). These firms operate in the “sweet spot” of the U.S. economy, lending money to established, mid-sized businesses. Because mid-sized businesses have difficultly accessing traditional bank financing, BDCs can often charge high interest rates on loans. That explains how the BIZD fund sports a dividend yield of 12.9%.
Alerian MLP ETF (NYSE: AMLP) is pretty straightforward to wrap your head around. This high-dividend ETF invests in partnerships that operate the pipelines, storage tanks, and processing plants of the energy industry. Unlike traditional oil companies, these partnerships generate steady fee income regardless of where energy prices go. Simple. Stable. Lucrative. This fund won’t make for the best gossip around the office water cooler, but many names in its portfolio sport long histories of paying steady, growing dividends to investors.
Finally, you have a simple story with the ProShares S&P 500 Dividend Aristocrats ETF (BATS:NOBL). This fund invests in a collection of S&P 500 companies that have raised their distributions for at least 25 consecutive years. I often describe these names as the “beachfront properties” of the stock market, because their long track records put them in a category above the rest of their peers. So it should come as no surprise that this high-dividend ETF has consistently beaten the broader stock market for decades.
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