Searching for high-yielding stock ETFs: 5 top choices
If you enjoy bird-watching, you know that your searches can take you pretty far afield. One moment you think you hear the Slab-Sided Bandersnatch in the backyard, and before you know it, you're standing in a field 5 miles away with an enraged bull charging at you.
Searching for yield can do the same thing. You start looking at money funds, you move to bond funds and pretty soon you're staring at an exchange-traded stock fund specializing in East Asia. And you can get very good yields from exchange-traded stock funds. You also get a heaping helping of risk.
Most people brush aside risk in a bull market, because, hey, it's a bull market and everything is going up. So before you reach for that high-yield stock ETF, remember these two numbers:
1.99%. That's how much interest you can earn from a 10-year Treasury note without fear of default for 10 years.
-43%. That's how much the Standard & Poor's 500 lost during its worst 12-month period since the Great Depression.
In other words, you have to be very comfortable with taking potential losses before you invest in a stock ETF for income.
That said, if you have the stomach for risk, here are some of the best, top-yielding stock ETFs on the market. These ETFs pass muster in three ways:
They paid more than 3% in dividends last year. Bear in mind that last year's dividend payout is no guarantee that this year's payout will be higher, lower, or the same as last year's payout.
Sharpe ratio greater than 1. The Sharpe ratio, created by Nobel Prize laureate William Sharpe, measures risk-adjusted return. The higher the Sharpe ratio, the better the return, given the amount of risk the fund takes.
Morningstar overall rating of 4 or 5. Morningstar's rating looks at how well the fund has performed relative to its peers.
Five of the best:
•iShares MSCI EAFE Minimum Volatility (EFAV). This fund looks for high-quality stocks in the MSCI Europe, Australasia, and Far East index that have low volatility — in other words, international stocks that don't have huge up-and-down swings. The fund has yielded 3.43% the past 12 months, and gained 11.7% during the same period. Expense ratio: 0.2%.
•Vanguard REIT ETF (VNQ). Real estate investment trusts buy, sell and manage commercial properties, such as shopping malls, office space — even storage units. The sector has been on a tear lately: This fund has gained 33.6% the past 12 months, so it's not cheap. But it yields 3.37%, and its expense ratio is just 0.10%. (Note: REIT dividends generally don't qualify for the lower qualified dividends tax rate.)
•iShares Select Dividend (DVY). One of the worst experiences you can have as an investor is to own a stock that cuts its dividend. Wall Street really hates that. This fund tries to screen out stocks that are likely to cut their dividends. Its 12-month yield is 3.05%, according to Morningstar, and it has gained 19.4% the past 12 months. Expense ratio: 0.39%.
•Vanguard High Dividend Yield ETF (VYM). The fund invests in large-company stocks that have high dividend yields. In large companies, high dividend yields either mean the company is a slow grower or its stock has been temporarily depressed. The fund has yielded 2.86% the past 12 months and gained 18.5% the same period. Expenses are an ultra-low 0.10%.
•SPDR S&P Dividend (SDY). The fund invests in companies that have raised their dividends for the each of the past 20 years. The fund has gained 16.9% the past 12 months, and its dividend yield the same period was 2.27%. Expense ratio: 0.35%.