Investors went crazy in December chasing "special dividends" from U.S. companies looking to front-run changes in tax law. But the truth is, investors seeking truly big dividends should look beyond U.S. large-caps. The huge diversity of ETFs offers the opportunity to find yield in many places. We thought we'd profile 10 ETFs with the highest portfolio yields—an indication of expected future yields.
Telecom stocks have long been a source of high-dividend-yield companies, so it's no surprise that IST makes our list. The fund holds telecom firms from the developed markets outside the U.S.
Vodafone is the dominant holding in the fund, making up more than 1/6 of IST's portfolio, with a 4% dividend yield. France Telecom makes up nearly 4% of its portfolio and brings a massive 13.8% dividend yield to the portfolio.
Unfortunately, there's some bad news in the mix. In August, Telefonica (the second-largest holding in IST, at 9.12%) declared it was abandoning its dividend policy in an effort to pay off its 57 billion euros of debt.
There's also the on-screen liquidity issue: IST's low asset base of $25 million and average daily dollar volume of $155,000 put it out of bounds for some investors. Still, if you're looking for international dividend exposure, here's your choice.
We know what you're thinking: A levered ETF? For yield? But if you can handle the path-dependency issues, leverage and inverse ETFs can be used to create some higher-yielding strategies.
EZJ is a great place to start. The ETF returns 2x the daily performance of the large- and midcap-focused MSCI Japan Index. Instead of physical equities, EZJ buys swaps agreements based on the total return of the iShares MSCI Japan ETF (EWJ).
EZJ's swap agreements account for the dividend distributions from EWJ, then embeds them in the net asset value calculation of the fund. You won't see any physical distributions from EZJ, but you'll note it's had pretty significant price movements as a result of the embedded distributions, as well as its levered exposure.
Despite issues of path dependency for long-term investors, EZJ is up 14.41%, compared with EWJ's 5.49%. Not bad, considering it's really a short-term trading vehicle.
The markets have always viewed preferred stock as a strange hybrid between equity and debt that gives access to better dividend yields. That's certainly the case for PGF: HSBC Holdings and Bank of America preferreds account for 16% of the fund's portfolio, with coupons in the range of 8%—who doesn't prefer that over typical fixed-income yields?
Clearly, everyone does: PGF boasts an astounding $1.7 billion in assets, the largest asset base by far on our list, and a clear sign of its juggernaut status among investors.
It's no secret that European banks and financial institutions have seen better days, but that's precisely what gives EWP its high-yield allure. More than 40% of the fund's portfolio is invested in names like Banco Santander and Banco Bilbao Vizcaya Argenta, which are yielding 7.6% and 5.6%, respectively.
Despite the ongoing crisis, investors haven't shied away from this fund—EWP has had more than $117 million in asset inflows in 2012. With many expecting things to improve (albeit marginally) in Europe this year, expect even more action for EWP.
PCEF invests in a slew of closed-end funds that invest in taxable investment-grade fixed-income securities, high-yield fixed-income securities, as well as funds that use an equity option writing strategy. The end result? Significant amounts of yield. If you can tolerate the uncertain exposure and premiums and discounts that come with closed-end funds, PCEF could pay off.
It's certainly attracting attention: PCEF has registered nearly $390 million in assets, with more than $137 million in inflows for 2012 alone. With an extended low-yield market environment, PCEF should continue to lure investors.
Last time EGPT was in the spotlight, the ETF was one of the few sources of price discovery during the Arab spring. We were surprised this one made the list, but it makes sense given that the country doesn't tax dividends for residents or nonresidents.
Combine that dividend-friendly environment with EGPT's portfolio and you have a recipe for yield. EGPT holds 26 firms; materials company Sidi Kerir Petrochemicals accounts for nearly 5% of the fund's portfolio and dished out a whopping 11.55% yield. Telecom Egypt accounts for more than 5% of the fund and comes in second, with a 10.21% yield.
At just short of $40 million in AUM, EGPT is not a juggernaut. But it produces some impressive yield.
SDIV buys the 100-highest-yielding companies in the world, subject to dividend sustainability screens. Not only does that create a juicy yield, but Global X says academic research suggests the fund's total return should impress as well.
The fund's portfolio is heavy on REITs and small-caps, with more than half of the portfolio currently invested in smaller firms. The fund has been less volatile than the broader market as well, with a beta of just 0.75 compared with the broad-based MSCI ACWI High Dividend Yield Index. Its largest single-country position is the U.S., at 36% of the portfolio, but it includes big slugs to the Asia-Pacific (36%) and Europe (28%) regions as well. Interestingly, the fund is almost exclusively focused on the developed markets, which represent 94% of the portfolio; it seems emerging economies have a bit of work to do before they crack the "super" list of 100.
MLPs are all about yield, and YMLP is the yield-iest MLP ETF on the market.
The fund, developed by the MLP research firm Yorkville Capital Management, focuses on what it says is a mispriced segment of the MLP market: commodity MLPs. It uses a fundamental strategy to find the highest-yielding MLPs with the best outlook for growing those yields and buys 25 of them. That includes firms like Ferrellgas Partners, which distributes propane under the popular "Blue Rhino" logo, and pays out a hefty 11.30% yield.
MLP ETFs are not for everyone, however. Due to current tax laws, the products can underperform individual MLP holdings or MLP ETNs when the underlying constituents pay out significant qualified dividend income. However, YMLP will likely ride the yield wave all the way to the bank.
During the financial crisis, the hip thing to do was to exclude financial companies from high-yielding portfolios. They had high payouts, but most thought that 50% of the financial community was going to disappear.
How the times have changed: Financial stocks have outperformed the broader market over the past year, and show little sign of weakening. Now those high yields offered by financial companies are popular again.
KBWD goes for that yield in a big way, buying between 24 and 40 of the highest-yielding financial companies. Those include a healthy swath of mortgage REITs (40%+ of the portfolio), business development companies (BDCs) and other yield-juicing companies. One downside: Once you add in the acquired fees from the BDCs it owns, the fund's stated expense ratio is a shocking 1.32%. It's also lagged the broader finance industry lately.
Looking for yield? Look no further than REM. Its 12.91% yield is no accident: Mortgage REITs have to pay out 50% of their earnings as dividends to avoid negative tax consequences. That strong payout has attracted good inflows into the space, as well as recent insider buying at mortgage REIT firms—both positive signals for the future.
Are there risks? Of course. DoubleLine bond guru Jeffrey Gundlach was recently cited in Barron's saying dividend cuts in mortgage REITs were almost certain. "In my experience, REIT prices do not go up when their dividends are going down," he said.
Still, REM's hefty yield could create a shiny, happy addition to a portfolio.