It’s easy to explain the popularity of high-dividend ETFs: High dividends equal high yields and a reliable cash flow. People who have current income as a primary investment objective are especially attracted to exchange-traded funds, or ETFs, that pay superior income, but dividends can be a boon to any investor.
[Sign up for stock news with our Invested newsletter.]
Dividends can enhance a holding’s total return, which includes both capital appreciation and income. Additionally, they can act as a cushion on the downside by providing cash payouts during downturns. Historically, dividend-paying investments are more stable and have a lower level of volatility compared to securities that don’t distribute income. This could be because shareholders are less likely to impulsively sell investments that have good dividend yields, or it could be that securities that regularly distribute income are generally better established and more financially sound.
Most high-dividend ETFs invest in income-producing stocks or bonds that have above-average yields compared to their peers. Others hold different types of securities like preferred stock, bank loans and collateralized loan obligations (CLOs) that emphasize income and dividends. Still others use aggressive or creative strategies like covered-call writing to generate even more income for shareholders.
All high-dividend ETFs provide professional management and a measure of diversification. Some invest in securities across many different sectors while others specialize in just one or a few kinds of securities from a smaller number of sectors. Whatever their particular methodology, the objective remains the same: consistently high dividend distributions.
Here are seven of the best high-dividend ETFs to buy today:
| ETF | Assets Under Management | Trailing 12-month Dividend Yield |
| Invesco High Yield Equity Dividend Achievers ETF (ticker: PEY) | $1.2 billion | 4.9% |
| SPDR Portfolio S&P 500 High Dividend ETF (SPYD) | $7 billion | 4.5% |
| iShares 20+ Year Treasury Bond Buywrite Strategy ETF (TLTW) | $917 million | 19.2% |
| VanEck IG Floating Rate ETF (FLTR) | $1.4 billion | 6.2% |
| Janus Henderson AAA CLO ETF (JAAA) | $7.5 billion | 6.3% |
| VanEck Preferred Securities ex-Financials ETF (PFXF) | $1.6 billion | 7.9% |
| Global X S&P 500 Covered Call ETF (XYLD) | $2.9 billion | 9.5% |
Invesco High Yield Equity Dividend Achievers ETF (PEY)
Income investors may have heard of the Nasdaq Dividend Achievers Index. That famous index is made up of U.S.-traded stocks that have a minimum of 10 consecutive years of increasing their annual dividend payments. The Nasdaq US Dividend Achievers 50 Index is a subset of the larger index that only includes the top 50 dividend achievers as ranked by dividend yield.
PEY is an index ETF designed to closely track the NASDAQ US Dividend Achievers 50 Index.
Dividend growth investing is attractive to investors because increasing dividends signal a company’s confidence in its own future revenue and earnings prospects. Investors feel that a stock that grows its dividend is one that’s steadfastly committed to shareholders. In addition, dividends that increase over time can act as a hedge against inflation by paying more to investors as the cost of living rises over time.
The index is reconstituted annually to reflect changes to the list of the top 50 highest-yielding dividend achievers. PEY will, of course, reflect these annual changes.
Assets under management: $1.2 billion Trailing yield: 4.9%
SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
The S&P 500 High Dividend Index is maintained by S&P Global. The index comprises the 80 highest-yielding stocks in the S&P 500. SPYD is a low-cost index ETF designed to mirror the S&P 500 High Dividend Index after subtracting the fund’s expense ratio of 0.07%.
SPYD is a variation on State Street Global Advisor’s $500 billion SPDR S&P 500 ETF Trust (SPY), which mimics the S&P 500. The rationale behind SPYD is to provide a large degree of the capital appreciation investors in SPY might enjoy, but with an appreciably higher dividend yield.
SPYD is part of the SPDR suite of low-cost index ETFs. Many investors use SPDR funds as core holdings that they consider the foundation of their portfolios. Being a high-quality, large-cap equity fund, SPYD would be appropriate in such a role.
Assets under management: $7 billion Trailing yield: 4.5%
iShares 20+ Year Treasury Bond BuyWrite Strategy ETF (TLTW)
The CBOE TLT 2% OTM BuyWrite Index is both a mouthful and a custom-designed index created specifically to be the benchmark for TLTW. By the same token, TLTW was designed to mirror that index.
The index and the fund hold only one long position: shares of the iShares 20+ Treasury Bond ETF (TLT). In addition to collecting dividends from TLT, the fund generates income through high volume selling of one-month covered calls against that ETF. More specifically, TLTW sells one-month calls that are 2% out of the money, meaning the strike price of the option is 2% higher than the market price of TLT.
Owing to uncertainty in the timing of upcoming interest rate cuts, the long-term government bond market has been very volatile this year. This unusual circumstance has allowed the managers at TLTW to generate very high call-option-premium income. Investors should enjoy this fund’s incredible yield while they can. Once rates begin to decline and bond market volatility flattens, the yield of TLTW will moderate significantly.
The fund’s expense ratio is 0.35%, which would be considered high for a passively managed index fund, but is very reasonable for this high maintenance ETF.
Assets under management: $917 million Trailing yield: 19.2%
[Read: 5 Cloud Computing ETFs to Buy Now.]
VanEck IG Floating Rate ETF (FLTR)
FLTR is a floating-rate bank loan fund that tracks the MVIS U.S. Investment Grade Floating Rate Index.
Floating-rate bank loans are business loans made by national and local banks to their commercial customers. The banks sell the loans to Wall Street investment bankers who collateralize them and turn them into bonds that can be bought and held by investors. Institutional investors like pension funds, insurance companies and funds like FLTR are Wall Street’s biggest bank loan customers. Retail investors generally don’t participate in the bank loan market except through mutual funds and ETFs.
Unlike fixed-income bonds, the floating-rate bank loan securities held by FLTR have an adjustable rate that will rise or fall as the interest rate environment changes. The advantage to floating-rate securities is that they tend to be less sensitive to the interest rate market and display less volatility than fixed-rate bonds.
Potential investors should be aware that FLTR can and does invest in foreign debt. Currently, 61% of the loans in the fund originated in the U.S., but the rest are invested in companies based in Europe, Asia and elsewhere.
The expense ratio for FLTR is just 0.14%.
Assets under management: $1.4 billion Trailing yield: 6.2%
Janus Henderson AAA CLO ETF (JAAA)
JAAA is an innovative ETF that invests its assets in a unique class of securities called CLOs, or collateralized loan obligations. CLOs are a sophisticated type of packaged and securitized debt security used by companies as a method of raising capital and financing operations.
Some CLOs issued by companies with high debt levels have a high default risk and are considered quite aggressive. JAAA avoids low-credit-quality issues and only invests in CLOs that have a AAA credit rating at the time of purchase.
By steering clear of low-credit-quality bonds, the managers at Janus Henderson look to provide investors with risk-managed access to this high-yielding asset class. The objective of the fund is to deliver consistent, low-volatility returns and yields that are significantly higher than other more traditional fixed-income assets.
The fund’s expense ratio is just 0.21%. That’s lower than what might be expected in a fund that invests in such a specialized field.
Assets under management: $7.5 billion Trailing yield: 6.3%
VanEck Preferred Securities ex-Financials ETF (PFXF)
PFXF is a high-yielding preferred stock fund that excludes securities issued by companies in the financial sector. The fund will invest in fixed-rate or adjustable-rate preferred stock and, to a lesser extent, in convertible preferred stock, meaning preferred stock that can be converted to common stock under certain circumstances. Preferred stock is an income-oriented security that gives investors priority over common shareholders in the event of a bankruptcy or liquidation event. Preferred shares trade on the same exchanges common stock shares do, but preferred shareholders tend to have less capital appreciation potential and often have no voting rights.
PFXF is an index fund based on the ICE Exchange-Listed Fixed & Adjustable Rate Non-Financial Preferred Securities Index. The index and the fund are weighted by market capitalization.
Preferred stock issued by AT&T Inc. (T), Ford Motor Co. (F) and Southern Co. (SO) are among the fund’s current top 10 holdings. The expense ratio of PFXF comes in at 0.41%, which is in line with most of its peers in the preferred stock ETF universe.
Assets under management: $1.6 billion Trailing yield: 7.9%
Global X S&P 500 Covered Call ETF (XYLD)
The most aggressive and — with an expense ratio of 0.6% — the most expensive high-dividend ETF on this list was saved for last.
In addition to collecting dividends on the stocks it holds, XYLD employs a dynamic covered call-writing strategy to generate an excellent dividend income for shareholders. The fund owns virtually all the stocks in the S&P 500 and earns significant option premium income by writing (that is, selling) standardized call options against those holdings.
This is a very hands-on, actively managed fund. At any given time, there will be multiple covered call positions on more than 500 stocks. These options expire or are exercised on a continuous basis and must all be replaced as they come due. XYLD may be a relatively expensive ETF compared to the others on this list, but investors can rest assured that the portfolio managers at Global X are earning every penny.
XYLD distributes dividends monthly and has done so for 10 consecutive years.
Assets under management: $2.9 billion Trailing yield: 9.5%
More from U.S. News
Sweep Accounts: What They Are and How to Open One
7 Best Electric Vehicle ETFs to Buy
7 of the Best Charles Schwab Mutual Funds
7 of the Best High-Dividend ETFs to Buy Now originally appeared on usnews.com
Update 04/25/24: This story was previously published at an earlier date and has been updated with new information.
