For some income investors, monthly dividends are of primary importance because they represent a key component of their retirement plan. Many retirees are seeking to withdraw a certain monthly check from their accounts to fund their lifestyle and have found it harder in recent years to achieve their income objectives. Oftentimes equity-income funds only pay dividends on a quarterly basis, and many bond yields have fallen to levels that are suboptimal to meet investor needs.
Under the current landscape, the CBOE Interest Rate 10-Year Treasury Note
(INDEXCBOE:TNX) is sitting at 2.7%, and a common dividend equity strategy such as the iShares Select Dividend ETF
(NYSEARCA:DVY) is yielding just 3.18%. Those yields certainly aren't going to inspire an extraordinary level of excitement for cash-hungry investors. Fortunately, there are a variety of ETFs that are in the business of providing high-dividend yields on a monthly basis to solve this problem.
Global X Funds
This ETF is focused on providing exposure to 50 of the highest-dividend-paying stocks, REITs, and MLPs in the United States. The fund is equal-weighted, so every holding in the underlying index gets an approximately 2% allocation of the total assets. The current 30-day SEC yield of DIV is 6.06%, and dividends are paid monthly to shareholders. In addition, this ETF is designed to select stocks that have lower average volatility than its peers.
So far this year, DIV has gained nearly 6% on the back of large exposure to the utilities, energy, and telecommunications sectors. These defensive areas have held up better than more consumer cyclical sectors that tend to be more volatile.
PowerShares Exchange-Traded Fund Trust II
PowerShares has introduced a unique solution to the high monthly income equation with KBWD, which has a current 30-day SEC yield of 7.48%. The fund holds a blend of 38 stocks primarily made up of mortgage REITs, banks, and other financial services companies. The concentrated nature and alternative style of the underlying holdings make this more of a specialized yield play for aggressive dividend seekers. The fund currently has a 38% weighting to mortgage REITs, which have been known to produce fantastic yields and also higher-than-average volatility.
So far this year, KBWD has gained 2.45% and has been in a steady uptrend since interest rates stabilized in the middle of 2013. The biggest headwind for this ETF moving forward will be a rising rate environment that may threaten the success of the underlying REITs and financial services companies.
First Trust Exchange-Traded Fd VI
This ETF invests in a diversified basket of 119 common stocks, REITs, preferred stocks, MLPs, and junk bonds, which coalesce to generate a 30-day SEC yield of 5.94%. Multiasset funds have become increasingly popular as a single vehicle to access a wide spectrum of income strategies. Less than two years since it was introduced, MDIV has been able to amass nearly $600 million in assets and gained 4.63% in total return so far this year.
What makes MDIV unique from other multiasset income funds is that it primarily focuses on the high-yield spectrum. The fund has no exposure to investment-grade bonds or other high-quality securities, which would ultimately lower the total yield of the portfolio.
Each of these ETFs offers a distinctive strategy that has strengths and weaknesses depending on the future direction of interest rates, equities, and alternative investments. The key to successfully integrating them into your portfolio will be to research them closely to make sure they align with your investment thesis, risk tolerance, and income objectives.
Read more from David Fabian, Managing Partner at FMD Capital Management:
5 Key Strategies for ETF Income Investors
VIDEO: First-Quarter 2014 Chart Review
Investors Should Avoid Adding New Money to Junk Bond ETFs
No positions in stocks mentioned.