Once upon a time, the conventional wisdom was that investors should hold stocks as a source of long-term capital appreciation while bonds could bring stability and a stream of meaningful current returns in the form of interest payments. But the appeal of bonds as a source of current income has been diminished by a prolonged period of record low interest rates, pushing yields down and forcing investors to look elsewhere for distributions. In many cases company stock now has distributions that exceed the yield on debt issued by the same entity, a unique phenomenon to say the least [see also 12 High-Yielding Commodities For 2012].
The same scenario plays out for many ETFs; with interest rates at record lows, the current return that can be derived from corporate debt has plummeted. Yet dividend payouts have remained largely untouched, as corporate profits have maintained strength and companies have sought to make a show of stability through a consistent distribution to shareholders [ETFdb Pro members can see the Monthly Dividend ETFdb Portfolio; sign up for a free 7-day trial for full access].
The iShares Investment Grade Corporate Bond Fund (LQD) recently had a 30-day SEC yield of about 3.2%, which is considerably higher than the yield available on Treasuries but below what is available through some ETFs that focus on dividend-paying stocks. Below, we profile a handful of dividend ETFs that offer meaningful yields:
- Dow Jones Select Dividend Index (DVY): This ETF offers exposure to a diversified basket of U.S. stocks by seeking to replicate an index that screens potential constituents by dividend-per-share growth rate, dividend payout percentage, and dividend yield. The result is a portfolio that includes many high yielding securities, with Lorillard (LO), Lockheed Martin (LMT), and Chevron (CVX) making up the largest weightings.
- High Dividend Equity Fund (HDV): This ETF seeks to replicate the Morningstar Dividend Yield Focus Index, a benchmark that is designed to include about 75 U.S. stocks that have provided relatively high dividend yields on a consistent basis. Currently, top components include AT&T (T), Pfizer (PFE), and Johnson & Johnson (JNJ).
- WisdomTree Equity Income Fund (DHS): This ETF is linked to a fundamentally-weighted index that measures the performance of high dividend yield stocks. Specifically, components are weighted to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year, based on the most recently declared dividend per share. Big weightings in DHS include T, General Electric (GE), and PFE.
- Global X SuperDividend ETF (SDIV): This ETF holds a basket of 100 equal weighted stocks from around the globe, focusing on the highest yielding securities available. While this strategy can pick up some risky beaten-down stocks, it also has the potential to deliver some huge dividend yields. At the end of June, SDIV had a 30-day SEC yield of about 8%.
|LQD||iShares Corporate Bond Fund||3.19%|
|DVY||iShares Dow Jones Select Dividend Index Fund||3.60%|
|HDV||High Dividend Equity Fund||3.61%|
|DHS||Equity Income Fund||3.84%|
|*As of 7/23/2012|
Disclosure: No positions at time of writing.