The major United States stock indexes are holding onto minimal gains as the calendar quickly approaches the mid-year mark. With investors getting a bit frustrated with the minimal returns in the stock market, especially considering the risk involved, where do investors turn to grow their investments? There are four ideas that include out of the ordinary investment choices as well as equity-based exchange-traded funds (ETFs) that are being discussed below.
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Alternative High-Income ETFs
The iShares S&P U.S. Preferred Stock ETF (ARCA:PFF) is composed of a basket of 251 preferred stocks that are listed on U.S. exchanges. The ETF has an expense ratio of 0.48% and is highly concentrated in the diversified financial sector and banks. The two sectors make up 73% of the entire allocation of the ETF. More importantly is the 30-day SEC yield on the ETF of 6.23%. Year to date the ETF is up 7.8%, beating the markets averages, not including the above-average dividend payout. The beauty of the preferred stock is that it has the ability to move higher with stocks and is also a linked to the performance of bonds.
SEE: Key Strategies To Avoid Negative Bond Returns
The PowerShares CEF Income Composite ETF (ARCA:PCEF) is a fund of funds as it is composed of a basket of closed-end funds (CEF). The whopping 8.1% 30-day SEC yield has attracted investors looking for high-income flows. Year to date the ETF is up 2.6%, not including the dividend payouts. Over 60% of the CEF that make up the ETF are bond related with another 26% considered option income CEFs. This ETF is unique in that it is a fund of funds, and due to that strategy the diversification is high even though it concentrates on a niche sector within the market.
SEE: Building An All-ETF Portfolio
Equity High-Income ETFs
There are also ETFs that invest in stocks that offer investors regular dividend payments well above the yield on Treasuries. The iShares High Dividend Equity ETF (ARCA:HDV) has a 30-day SEC yield of 3.8%, more than double the yield on the 10-year Treasury. The ETF is composed of 75 stocks mainly in the healthcare, consumer goods, telecom and utilities sectors. The top holdings include AT&T (NYSE:T), Pfizer (NYSE:PFE) and Verizon Communications (NYSE:VZ). Year to date the ETF is up 5.6% without dividends included. The beauty of HDV is that it has beaten the S&P 500 with a higher dividend and less volatility.
The EG Shares Low Volatility Emerging Markets Dividend ETF (ARCA:HILO) is designed to provide high income and less volatility than the MSCI Emerging Markets Index. The ETF is composed of 30 stocks and the index is currently yielding 6.44%. Thailand, China, Brazil and South Africa are the most heavily weighted countries in the ETF. Year to date the ETF is up 0.5%, and is basically in-line with the return of the iShares MSCI Emerging Markets ETF (ARCA:EEM). The ETF charges an annual expense ratio of 0.85%.
SEE: 4 Misconceptions That Sink Emerging Market Investors
The Bottom Line
When looking for high-income ETFs or stocks, it is integral to expand the search beyond solely the dividend yield. It is irrelevant how high a dividend yield is considering the ETF or stock could fall by much more than the percentage of the dividend. You must ask yourself if you would buy the ETF or stock even if the dividend yield was average. If the answer is no, then the investment should not be bought.