Exchange-traded funds are gaining prominence as preferred investment vehicles for part-time investors seeking a simple way to diversify their portfolios; however, the rise in the number of available funds increases the difficulties of selecting top dividend ETFs, cautions Ned Piplovic, ETF expert and editor of DividendInvestor.
These ETFs offer high dividend yields, along with potential for significant capital appreciation. In addition to their focus on total returns from diversified equities, these ETFs combine advantages of stocks and mutual funds for the benefit of their investors.
Instead of investing in individual stocks, which carry high risk if a stock's share price falls, ETF investors have reduced risk exposure through diversification. However, reduced risk may be a welcome trade-off for investors who take a long-term approach and want to avoid losing money.
While mutual funds offer diversification, they cannot be traded throughout the day when the market is open in the way that investors can trade stocks and ETFs. Plus, ETFs have much lower fees, which translate to higher total returns over extended periods.
Here are 11 top dividend ETFs that offer high dividend yields.
Note: All performance numbers were compiled on June 20, 2018.
#11: Invesco Zacks Multi-Asset Income ETF (CVY)
Dividend Yield: 4.02%
This is a medium-sized value fund that tracks the performance of the Zacks Multi-Asset Income Index and invests at least 90% of its assets in the underlying index.
Financials is the top sector represented in the fund, with a 24% share. Out of the current 149 holdings in the ETF, the top-10 holdings account for just 11% of the invested assets. In addition to the fund's 4.02% current yield, the share price rose 8.1% over the past 12 months for a total return of 12.4%.
#10: Invesco Variable Rate Preferred ETF (VRP)
Dividend Yield: 4.76%
This fund invests at least 90% of its total assets in the securities that comprise the Wells Fargo Hybrid and Preferred Securities Floating and Variable Rate Index. The market cap-weighted index tracks the performance of its holdings' preferred stocks and other securities that are functionally equivalent to preferred stocks. The fund's total expense ratio is 0.50%.
Financials sector equities represent an 80% asset share of the fund's holdings. The fund's top three sectors -- Energy and Industrials along with Financials -- account for 95% of the fund's holdings. The top-10 holdings account for less than 20%.
#9: Invesco Financial Preferred ETF (PGF)
Dividend Yield: 5.22%
This fund tracks the performance -- before fees and expenses -- of the Wells Fargo Hybrid and Preferred Securities Financial Index. The fund's investment in 89 individual equities equals $1.56 billion in total assets.
The ETF has experienced volatility over an extended period, but the fluctuation stayed within the $17 to $19 a share range over the past five years. The share price declined 3.2% over the past year. However, the total dividend distribution over the same period overcame that drop and turned a small asset depreciation into a 2.1% total return on shareholders investment in the past 12 months.
#8: Invesco Preferred ETF (PGX)
Dividend Yield: 5.89%
Based on The ICE BofA ML Core Plus Fixed Rate Preferred Securities Index, the fund generally invests at least 80% of its total assets in fixed-rate preferred securities issued in the U.S. domestic market.
More than 90% of the fund's holdings are concentrated in just three sectors -- Financials, Real Estate and Utilities -- with the Financials sector's share exceeding 70% by itself. As approved by the trust's board of trustees, the fund changed its name on June 4, 2018, from PowerShares Preferred Portfolio to its new name of Invesco Preferred ETF.
Nearly two-thirds of the fund's holdings carry a BBB rating or higher, which is considered Investment Grade by Standard & Poor's.
While the fund's share price pulled back 3.5% over the past 12 months, that level of fluctuation is consistent with the fund's five-year trend of moderate volatility while mostly trading between $14 and $15. However, the company's dividend income exceeded the share price decline and offered shareholders a 2.1% total return for the year.
#7: First Trust Preferred Securities and Income ETF (FPE)
Dividend Yield: 5.22%
Under normal market conditions, this fund invests at least 80% of its net assets in preferred securities and income-producing debt securities including corporate bonds, high-yield securities and convertible securities.
As of May 31, 2018, nearly 70% of the fund's $3.5 billion in assets were in Fixed-to-Floating Rate and Fixed-to-Variable Rate Securities, 16% in Fixed Rate Securities, 14% in Floating Rate Securities and less than 1% in Step-Up Rate Securities.
U.S. securities accounted for slightly more than half of the fund's assets. United Kingdom and France each contributed approximately 9% share of assets, with seven additional countries rounding out the remainder. Each of the latter countries individually accounted for less than a 5% share.
The fund's share price during the past 12 months was down slightly. Thanks to the fund's dividend payments of nearly $1 per share in the past year, its total return rose 1% during the past 12 months.
That result shows the value of owning dividend-paying equities, which can turn small share-price losses into total return gains, as well as boost total returns beyond share-price appreciation.
#6. iShares S&P US Preferred Stock Fund (PFF)
Dividend Yield: 5.58%
This fund tracks the investment results of the S&P U.S. Preferred Stock Index and generally will invest at least 90% of its assets in the component securities of the underlying index. According to the Morningstar Style Box evaluation, this is a Small Growth fund.
The fund's $16.3 billion in total assets is spread across 300 individual holdings. The top three sectors by share of assets are Banks (34%), Diversified Financials (25%) and Real Estate (14%).
The recent share price is 4% below its level from 12 months earlier. However, a look at the long-term share price movement reveals that the price has been trading with similar fluctuations between $37 and $40 a share over the past five years. The combined effect of the share-price movement and the total dividend distribution over the past 12 months is a net total return of 1.2%.
#5: Arrow Dow Jones Global Yield ETF (GYLD)
Dividend Yield: 7.23%
The Arrow Dow Jones Global Yield ETF is a multi-asset class composite index comprised of equally weighted exposure across five global yield categories -- Global Sovereign Debt, Global Equity, Global Corporate Debt, Global Real Estate and Global Alternative. The fund has more than $70 million in total assets distributed across more than 160 individual holdings.
The share price fell almost 5% over the last year but the dividend yield of more than 7% overcame the share-price drop to deliver a total return of 2.4%. That positive total return amid share-price erosion is another example of the power of owning a high-dividend-paying fund.
#4: Global X SuperDividend ETF (SDIV)
Dividend Yield: 7.51%
The fund seeks to invest nearly $1 billion of its total assets in 100 of the highest-dividend-yielding equity securities in the world. As of June 2018, the fund had its assets diversified across 104 individual equities. The top-10 holdings combined for less than 13% of total assets.
The fund boosted its annualized dividend for 2018, which is the second consecutive annual hike and fifth increase in the past seven years. The dividend distributions over the past year overcame the share-price drop to deliver a 6% total return over the past 12 months.
#3: UBS ETRACS Monthly Pay 2x Leveraged Dow Jones Select Dividend Index ETN (DVYL)
Dividend Yield: 7.6%
This sole exchange-traded note (ETN) among the funds on this list is linked to the monthly compounded 2x leveraged performance of the Dow Jones U.S. Select Dividend Index. The ETN has more than $40 million in total assets spread across 100 individual holdings.
The ETN's share price rose more than 9% in the past 12 months to combine with the dividend distributions for a total return of nearly 17% over the same period. The share price and dividend distributions rose in parallel to combine for total returns of 67% and 161% over the past three and five years, respectively.
#2.: YieldShares High Income ETF (YYY)
Dividend Yield: 8.56%
The YieldShares High Income Fund operates a "fund of funds" and tracks the performance of the ISE High Income Index, which provides exposure to the top closed-end funds measured by yield, discount to net asset value and liquidity. The fund had approximately $200 million in total assets spread across 30 individual holdings and cash. The current asset allocation is 75% bonds and 25% stocks.
The ETF's share price has been fluctuating between $18 and $20 over the past two years. Even though the fund's share price has fallen 5.6% in the past 12 months, the dividend distributions over the past year more than compensated to deliver a 2.4% total return since June 2017.
#1: Invesco PowerShares KBW High Dividend Yield Financial Portfolio (KBWD)
Dividend Yield: 8.6%
The PowerShares KBW High Dividend Yield Financial Portfolio uses the KBW Nasdaq Financial Sector Dividend Yield Index as its basis. As of January 2, 2018, the fund had total assets of approximately $330 million allocated across 38 individual holdings.
The ETF is on track for a third consecutive annual dividend boost in 2018. While the share price declined 2.1% over the past year, the price gained 13% over the past two years and 7% over the past four months. Additionally, the company's robust dividend distribution delivered a 6.3% total return over the past 12 months.
This list of 11 high-yield-dividend-paying funds shows how the payouts can make the difference between investing profitability or taking a loss, if not boosting already positive returns when share prices rise.
Investors may not be able to predict how individual funds and stocks will perform but owning dividend-paying equities helps to reduce the fallout during rough market conditions and enhances total returns regardless of share-price fluctuations.
