The S&P 500 has produced a return of 16% over the last 12 months, an above-average annualized gain. Most investors realize that the norm going forward could be single-digit annual gains and therefore are always on the lookout for high-income-producing investments. With the 10-year yield on the verge of hitting a new five-month low, it is not easy to find investments with annual yields above 5%. I have come up with four ETFs that offer high dividend payouts from a variety of asset classes. Keep in mind that investors can still lose money on the ETFs because a drop in the price of the ETF could erase the yearly dividend payments. Therefore, I suggest you do your homework and make sure the ETF fits into the investment strategy of your portfolio. (For more on ETF, check out 5 Ways To Find A Winning ETF.)
TUTORIAL: Exchange-Traded Funds
1. iShares S&P US Preferred Stock Index ETF (NYSE:PFF) offers exposure to an asset class that is often overlooked by investors. The ETF is composed of 245 preferred stock holdings from companies around the globe. The index is heavily weighted to the preferred stocks of financial firms such as HSBC Holdings ADR (NYSE:HBC) and Metlife (NYSE: MET). The current 12-month yield is 7.3% and the annual expense ratio is 0.48%.
2. PowerShares CEF Income Composite ETF (NYSE:PCEF) invests in a basket of 116 closed-end funds that in turn invest taxable fixed income securities and others that utilize equity option writing strategies. The current 12-month yield on the ETF is 8.5% and the total annual fund operating expenses are 1.62%. The yield and the low volatility of the ETF are very attractive. However, the high expenses are well above the average for an ETF. This makes PCEF a questionable buy for the cost-conscious investor. (To learn more on ETFs, check out 10 Ways ETFs Can Grow Your Portfolio.)
3. Market Vectors Emerging Markets Local Currency Bond ETF (NYSE:EMLC) follows an index that provides investors with direct exposure to local currency bonds issued by emerging-market governments. The current yield is about 6.1% and the net expense ratio is 0.49%. The ETF offers exposure to 15 different emerging market countries and 174 various holdings. The ETF began trading last July and has stayed within a 10% trading range during that time. A factor in the movement of EMLC will be the action of the U.S. Dollar Index as well as the strength of the emerging-market economies.
4. Guggenheim S&P Global Dividend Opportunities ETF (NYSE:LVL) is composed of stocks from around the globe that meet specific requirements such as market cap and dividend yield. There are a total of 100 stocks in the ETF and they have an average market cap of $7.6 billion and trade with a P/E ratio of 11.3. The current yield on the ETF is about 5.3%. Some of the top holdings in the ETF come from the U.S. (23%), Australia (11%) and the UK (9%). The expense ratio is 0.6%. (For learn more on ETFs, see An Introduction To Sector ETFs)
Investors that buy into a stock or ETF based primarily on the dividend yield must heed caution. Even though an ETF may pay out a high dividend, it does not mean it is a sure thing. The price of the ETF could fall by a percentage higher than the dividend over a year and the net result could be a loss. I suggest looking at the dividend yield as a bonus when buying into an ETF that you feel will increase in value. (For more negatives to look out for, read 5 ETFs Flaws You Shouldn't Overlook.)