High-dividend exchange-traded funds, or ETFs, are an increasingly popular asset class, and it’s not hard to understand why. A high dividend is synonymous with high investment income. Everyone likes to see their investment capital grow, but growth is not the only benefit of investing in the capital markets.
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Some investors, in fact, have income as their primary objective with capital appreciation being a secondary consideration. In many cases, ETFs that pay have above-average dividend yields can offer the best of both worlds. That is, provide a high and growing dividend and the potential for growth over time.
What Is a Dividend?
A dividend is a share of revenues and profits that a company distributes to shareholders. Generally, dividends are paid in cash. The company’s board of directors declares a dividend of a specific amount per share to be paid to shareholders who own the stock as of a certain date, called the record date. On another date — usually not far in the future — called the payment date, the company pays the dividend which is automatically deposited in the shareholder’s brokerage account.
A company can declare a dividend at any time. Most public companies that pay regular dividends make distributions quarterly, although some — about 80 in number — make monthly payments.
What Are the Benefits of Dividends?
Dividend distributions are part of a stock’s total return. In other words, the income a stock produces is a factor in calculating overall performance. In that sense, dividends can be seen as enhancing returns in a tangible way.
Further, dividends can have the effect of cushioning against downturns and bear markets. Once a dividend is paid, it can be saved in a money market or savings account, used to defer current expenses or reinvested back into the market. Regardless of how an investor chooses to use a dividend, once it’s paid, it’s a realized gain.
Companies that can afford to pay dividends are generally more mature, more stable and more financially sound than companies that can’t. Savvy investors see dividends as a sign of a company’s fiscal health and commitment to shareholders.
Why Invest in High-Dividend ETFs
ETFs are pooled investment funds that offer investors diversification and professional management in a single security that trades on major exchanges just like shares of stock.
Most high-dividend ETFs invest in income-producing securities, such as dividend-paying stocks and interest-bearing bonds, that have above-average yield when compared with their peers. Some others hold less-well-known kinds of investments, such as business development companies, floating-rate bank loans, preferred stocks and collateralized loan obligations. The most aggressive high-dividend ETFs use derivative securities, such as options, futures and swap contracts, to generate the superior income they distribute to shareholders.
Different high-dividend ETFs use different strategies, but they all have the same aim: to provide investors with a high and reliable dividend while also offering them the possibility of capital appreciation.
| High-Dividend ETF | Assets Under Management | Trailing Dividend Yield |
| Global X Alternative Income ETF (ticker: ALTY) | $34 million | 7.3% |
| SPDR Portfolio S&P 500 High Dividend ETF (SPYD) | $6.9 billion | 4.4% |
| Tortoise North American Pipeline Fund (TPYP) | $558 million | 4.4% |
| Virtus Private Credit ETF (VPC) | $52 million | 11% |
| Invesco High Yield Equity Dividend Achievers ETF (PEY) | $1.2 billion | 5% |
| iShares 20+ Year Treasury Bond Buywrite Strategy ETF (TLTW) | $855 million | 17.5% |
| VanEck Preferred Securities ex Financials ETF (PFXF) | $1.7 billion | 7.6% |
Global X Alternative Income ETF (ALTY)
ALTY is an index ETF that’s designed to mirror one of the most unique and innovative dividend indexes available. Namely, the Indxx SuperDividend Alternatives Index.
In replicating the index, ALTY invests in a range of alternative securities that include master limited partnerships, business development companies, or BDCs, preferred stock, emerging market bonds and call options.
The primary objective of the fund is to provide a high, sustained dividend income. Any capital appreciation that the fund experiences will be a function of the interest rate environment. In other words, the fund may go up when rates go down but it isn’t being managed for that eventuality.
This fund is appropriate for aggressive investors looking to generate superior income from a diversified pool of alternative investments. ALTY distributes dividends monthly rather than quarterly and has not missed a dividend in more than eight years.
Assets: $34 million Trailing yield: 7.3%
SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
The SPDR brand of ETFs is among the best-known fund families in the asset management industry. SPDY is an index fund based on the S&P 500 High Dividend Index, which consists of the 80 highest-yielding stocks in the S&P 500.
SPDY is a low-cost fund with an expense ratio of just 0.07%. This allows the fund to replicate the performance of the index with very little tracking error. The fund is designed to provide a substantial degree of the capital appreciation an investor would get from an S&P 500 fund but with an appreciably higher dividend income.
Investors with a conservative investment profile will appreciate that all the stocks in SPYD are well-established, large-cap companies. This fund could certainly serve as a core holding in any portfolio.
Assets: $6.9 billion Yield: 4.4%
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Tortoise North American Pipeline Fund (TPYP)
TPYP is an energy infrastructure fund that mirrors the Tortoise North American Pipeline Index.
The fund has 46 holdings. Considered in aggregate, they give investors an equity and income interest in an incredibly large and important pipeline network that serves the largest energy consumers in the world.
The fund’s largest stock holding is Williams Companies Inc. (WMB), which distributes natural gas throughout much of the U.S. TPYP also has a significant position in Enbridge Inc. (ENB), an operator of pipelines that facilitate the distribution of crude oil, natural gas and other hydrocarbon energy resources.
Most investors will not be familiar with the index that underlies TPYP, but, in the pipeline industry, it is known as a leading benchmark for the sector. The income and total return potential of this unique fund will be very attractive to most investors.
Assets: $558 million Yield: 4.4%
Virtus Private Credit ETF (VPC)
VPC seeks to provide a dependable, high-dividend yield by investing in BDCs, and closed-end funds that focus on the exciting and fast-growing private credit market.
VPC mirrors the Indxx Private Credit Index, which is designed to reflect the performance of the domestic, publicly traded BDC and closed-end fund universe.
There are 58 holdings in the portfolio. The fund is dividend-weighted, meaning that BDOs or funds with higher dividend yields receive larger allocations. There is, however, a single security cap of 5% of AUM. The largest holding in VPC is currently Oxford Lane Capital Corp. (OXLC), which represents a little more than 3% of assets.
Because of the unique nature of the securities in VPC, the fund is attractive from both an income and a diversification perspective.
Assets: $52 million Yield: 11%
Invesco High Yield Equity Dividend Achievers ETF (PEY)
The Nasdaq Dividend Achievers Index is well-known among income investors. It is made up of domestic stocks that have raised their dividend every year for at least 10 consecutive years. There is a lesser-known index called the U.S. Dividend Achievers 50 Index, which screens all dividend achievers and only includes the top 50 highest-yielding stocks.
PEY is an ETF that tracks the Nasdaq Dividend Achievers 50 Index and thereby provides appreciation that rivals the larger index but provides a higher yield.
This fund is a convenient and simple way to invest in the popular strategy called dividend growth investing. When a company can afford to grow its dividend year-in and year-out, that usually means it has confidence in its ability to produce revenue and earnings over the long run.
PEY is a natural choice for high-dividend ETF investors.
Assets: $1.2 billion Yield: 5%
iShares 20+ Year Treasury Bond Buywrite Strategy ETF (TLTW)
Selling covered calls is a proven and dependable method of generating investment income. TLTW has an innovative and profitable approach to the standard covered call strategy.
TLTW tracks the CBOE TLT 2% OTM Buywrite Index, which was custom designed as a vehicle for the fund.
The fund holds shares of the iShares 20+ Treasury Bond ETF (TLT). That is its only long position. It generates income by collecting dividends on TLT and by continuously selling one-month covered calls against that fund in large-volume transactions. As part of its methodology, TLTW sells options that are about 2% out of the money, or, put another way, options that have a strike price of about 2% higher than the market price of TLT.
From an income-generation perspective, TLTW does better when interest rate volatility is higher. That’s why the yield is so high right now. Investors should expect income to moderate if and when rates begin to fall and volatility lessens.
Assets: $855 million Yield: 17.5%
VanEck Preferred Securities ex Financials ETF (PFXF)
Preferred stocks were conceived with income in mind. They are high-yielding securities issued by public companies that trade like common stock but don’t provide an equity interest. Technically speaking, they are not bonds, but they do exhibit many of the characteristics of fixed-income investments.
PFXF is a preferred stock fund that purposefully excludes stocks issued by the financial sector. The fund buys and holds fixed-rate and adjustable-rate preferred stock as well as convertible preferred stock. Convertible preferred is a special class of security that can be exchanged for a predetermined number of common shares at the shareholder’s discretion.
The fund is based on the ICE Exchange-Listed Fixed & Adjustable Rate Non-Financial Preferred Securities Index. The index and the fund are cap-weighted, meaning prominence in the portfolio is based on the market cap of the listed companies.
A glance at the top holdings within PFXF will reveal some household names such as automaker Ford Motor Co. (F), $145 billion utility NextEra Energy Inc. (NEE) and one of the original phone companies, AT&T Inc. (T).
Assets: $1.7 billion Yield: 7.6%
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7 of the Best High Dividend ETFs to Buy Now originally appeared on usnews.com
Update 07/01/24: This story was previously published at an earlier date and has been updated with new information.
