Dividend-paying exchange traded funds (ETFs) have been growing in popularity, especially among investors looking for high yields and more stability from their portfolios. As with stocks and many mutual funds, most ETFs pay their dividends quarterly—once every three months. However, ETFs that offer monthly dividend returns are also available. This regular monthly income helps many fixed-income individuals but can also provide a great choice for all investors in a volatile market atmosphere.
Monthly dividends can be more convenient for managing cash flow, and help with budgeting with a predictable income stream. Further, these products give greater total returns, if the monthly dividends are reinvested.
Range of Choices and Risks
Luckily, there are a plethora of monthly dividend ETF funds offered by the major firms, including State Street Global Advisors, Vanguard Group, and BlackRock, Inc. However, there are also smaller firms such as Global X Funds that are increasing their pressence in the ETF arena. These investment products have become nearly household names and include the popular Spider SPDR and iShares products.
Before any investor falls too head-over-heels in love with these products, they must do their due diligence and review the ETF for its expenses and risk. While getting dividend income every month may sound appealing, the investor must offset the expenses of the holding against its benefits.
Fund managers sometimes offer high double-digit yields that they cannot sustain in order to attract investors who would otherwise ignore them. It is important to pay attention to expense ratios, as well. Remember, the less money that goes into a manager’s pocket the better. Some funds may return their high income through the use of leverage which may not suit the risk tolerance of all investors.
(For more, see: Due Diligence on Dividends.)
The following list of exchange traded funds do not appear in particular order and are offered only as an example of the funds that fall into the category of the monthly dividend paying ETFs. The performance figures are as of October 2017.
Global X SuperDividend
Assets Under Management: $1.03 billion
Total Expenses: 0.58%
Yield (12 mo.): 6.57%
2016 Return (Price): 13.31%
The fund includes common stocks, real estate investment trusts (REITs) and master limited partnerships (MLPs) that must combine top returns with lower-than-average volatility to be included in the index.
Global X U.S. SuperDividend U.S.
Assets Under Management: $425.6 million
Total Expenses: 0.45%
Yield (12 mo.): 6.13%
2016 Return (Price): : 10.61%
Established in 2013, DIV is a relatively small ETF. Like its international counterpart, it focuses on a basket of a low-volatility, high-yielding securities, the objective is to track the performance of 50 equally weighted common stocks, MLPs and REITs within the INDXX SuperDividend U.S. Low Volatility Index.
It has performed very well against its benchmark, returning an annualized average of 6.2% over the last four years. Securities listed in the index are among the highest-yielding in the United States, and they have lower relative volatility than the market. It pairs very nicely with SDVI for investors who want a truly global grip on high-yielding equities.
PowerShares S&P 500 High Dividend
Assets under management: $3.02 billion
Total Expenses: 0.30%
2016 Return (Price): 22.36%
As it says on the tin, the PowerShares S&P 500 High Dividend Low Volatility ETF (SPHD) looks for stocks that both pay high dividends and offer low volatility. It is heavily weighted toward utilities. Other holdings include Health Care REIT, Inc. (HCN) and Altria Group, Inc. (MO). The fund’s low expenses are especially attractive.
WisdomTree U.S. High Dividend
Assets Under Management: $1.24 billion
Total Expenses: 0.38%
Yield (12 mo.): 3.25%
2016 Return (Price): 8.63%
DHS mimics the WisdomTree High Dividend Index, a fundamentally weighted index that features companies ranked by dividend yield with average daily trading volumes of at least $200 million. The fund’s holdings are well diversified among sectors such as real estate, health care, energy/utilities, and consumer staples.
Assets Under Management: $5.31 billion
Total Expenses: 0.5%
Yield (12 mo.): 5.6%
2016 Return (Price): .85%
The PowerShares Preferred Fund (PGX) is another preferred stock ETF that delivers on yield. PGX's objective is to replicate the performance and yield of the BofA Merrill Lynch Core Fixed-Rate Preferred Securities Index. Its portfolio holds more than 200 preferred stocks with a heavy weighting towards the financial sector. and a smaller presence in telecommunications, industrials, and energy. Less than 5% of the portfolio is invested in A- and AA-rated securities, while the rest is invested primarily in BBB- or BB-rated securities. Launched in January 2008, the fund has returned an annualized 5.66% since 2013; last year was rough, but it is currently up 10% year-to-date.
PowerShares KBW High Dividend
Assets Under Management: $329.94 million
Total Expenses: 2.99%
Yield (12 mo.): 8.32%
2016 Return (Price): 20.48%
Based on one of the prestigious Keefe, Bruyette & Woods NASDAQ indexes, the PowerShares KBW High Dividend Yield Financial Portfolio ETF fund's fat dividend yield is pretty tempting. KBWD is heavily weighted (at least 90%) towards publicly held financial companies, which should perform better in a rising interest rate environment.
iShares U.S. Preferred Stock
Assets Under Management: $18.7 billion
Total Expenses: 0.47%
Yield (12 mo.): 5.68%
2016 Return (Price): 1.3%
The iShares U.S. Preferred Stock ETF (PFF) is a viable alternative for investors seeking high yields. PFF was launched in March 2007, and as of October 2017, it was the largest fund in its category. PFF seeks to mirror the performance and yield of the S&P U.S. Preferred Stock Index. The portfolio is well diversified, with no security weighted more than 3.23%. However, it does tend to favor financial companies that are big issuers of preferred securities. More than 80% of the portfolio is invested in BBB- or B-rated securities and less than 8% is invested in A-rated or better. Preferred stock ETFs are generally designed for income, not outperformance, as is the case with PFF, which has delivered a steady total return of 5.29% over the last five years.
SPDR Dow Jones Industrial Average
Assets Under Management: $19.1 billion
Total Expenses: 0.17%
Yield (12 mo.): 2.11%
2016 Return (Price): 16.37%
The SPDR Dow Jones Industrial Average ETF (DIA) does not offer the highest yield, but investors who prefer some capital appreciation potential with their income might find its portfolio attractive. Launched in January 1998 (making it one of the oldest ETFs still standing), the fund is one of the few to directly play the Dow Jones Industrial Index (DJIA) – itself the grandpa of stock indexes, composed of 30 of the bluest blue chip companies. It has done a commendable job of tracking the DJIA, returning 7.41% over the 10 years since 2005 and 10.70% over the five years since 2010.
(For more, see Top 3 ETFs That Track the Dow for 2017.)
The Bottom Line
High-dividend ETFs offer a cheap, easy way to add an extra stream of income to the portfolios of retirees and beginning investors alike. As always, it is important to do your due diligence on any fund before committing your hard-earned cash.