Since the Great Financial Crisis, finding reliable yield has been a long, slow process. In addition, investors have had a difficult time in the face of central banks cutting interest rates and introducing vast amounts of monetary stimulus. However, these trends have reversed in some parts of the world of late; for example, the U.S. Federal Reserve is consistently hiking interest rates to combat inflation, and central banks worldwide are taking similar actions.
Moreover, the U.S. 10-year Treasury yield climbed from a low of 1.32% back in 2016 to 3.97% in September 2022. Given these developments, it’s worth asking: should investors still consider piling on risk in alternative investments in search of higher yields? Or should they settle with Treasuries and investment-grade bonds now that they can generate yields again?
In the search for yield, exchange-traded funds (ETFs) have become a somewhat unlikely candidate. Instead, investors looking for yields higher than 2% to 3% may need to search for investments with large distributions. In some cases, these investments can be undertaken with ETF vehicles, some of which, for the second quarter of 2022, produced between 7% and 15% in dividends.
Key Takeaways
- With falling stock prices, rising inflation, and rising interest rates, investors are looking for relatively safe investments that produce a good yield.
- The 10-year Treasury note yield is at a multi-year high alongside high-yield dividend ETFs.
- Exchange-traded funds (ETFs) have become a surprising option for those seeking high yields.
- The ETFs that tend to provide the highest yield tend to be found in the following categories: Mortgage REITs, Master Limited Partnerships (MLPs), and Superdividends.
Mortgage REIT ETFs
For the second quarter of 2022, several ETFs are producing double-digit yields based on the average dividend yield of their holdings and the latest 30-day SEC yields. Many mortgage REITs own mortgage-backed securities, unlike equity REITs, which hold physical real estate. Mortgage products, in this case, typically employ leverage.
Mortgage REIT ETFs appear to be doing well during a period when inflation is high, and the housing market is up. Some examples of REIT ETFs doing well as of October 2022 are:
- VanEck Vectors Mortgage REIT Income ETF (MORT): a 12-month yield of 14.15%
- iShares Mortgage Real Estate ETF (REM): a 12-month yield of 12.52%
MLP ETFs
Master limited partnerships (MLPs) are another category of companies traditionally providing high yields. MLPs tend to focus on energy infrastructure businesses like storage facilities or pipelines. Three MLP-based ETFs that enjoyed high yields as of October 2022 are:
- Infracap MLP ETF (AMZA): 12-month yield of 9.28%
- Global X MLP & Energy Infrastructure ETF (MLPX): 12-month yield of 5.61%
- Global X MLP ETF (MLPA): 12-month yield of 7.54%
Dividend ETFs may have fewer holdings than non-dividend funds. This makes the fund much more prone to volatility because one stock can affect the fund more than in an ETF with more holdings.
Financial ETFs
Financial ETFs generally hold many stocks from financial institutions, banks, and insurance companies. Other holdings might be private equity or mortgage REITs. For example, the Invesco KBW High Dividend Yield Financial ETF (KBWD) has a 12-month yield of 11.94% and consists of 61.57% financial services and 36.96% real estate.
Superdividend ETFs
So-called “superdividend” ETFs look for stocks in any country and sector. Their focus is solely on high yields. For example, the Global X SuperDividend ETF (SDIV) is a leader among this group of ETFs, weighing 100 of the best dividend-yielding stocks in the world to produce a 15.49% yield in October 2022.
Global X has other superdividend ETFs available, each focusing on a slightly different goal. As of October 2022, two superdividend ETFs stand out:
- Global X MSCI SuperDividend EAFE ETF (EFAS): a 12-month yield of 8.38%
- Global X MSCI SuperDividend Emerging Markets ETF (SDEM): a 12-month yield of 12.31%
Which ETF Has the Highest Yield?
One of the highest-yielding ETFs is the Global X SuperDividend ETF (SDIV), which yielded 15.49% in October 2022.
What Is the Best ETF for Dividends?
Many ETFs pay dividends, so labeling one as the best one is a subjective task. There are also many investing theme dividend ETFs, so it’s best to analyze the ones that interest you to find the ones with the returns and risks suitable for your goals and tolerances.
What Are the Top ETFs to Buy?
There are hundreds to choose from, but some good ETFs are Invesco S&P 500 GARP ETF (SPGP), iShares Russell Top 200 Growth ETF (IWY), Vanguard Mega Cap Growth ETF (MGK), Schwab U.S. Large-Cap Growth ETF (SCHG), iShares Russell 1000 Growth ETF (IWF).
The Bottom Line
Many investors tend to think of ETFs as stable, less-risky alternatives to many other popular investment vehicles. While this may be true sometimes, the products listed above focus on baskets that may be inherently riskier than other ETF baskets.
While these ETFs enjoy high average dividend yields for their holdings and strong 30-day SEC yields, suggesting that they are somewhat sustainable, there is never a guarantee that any particular non-Treasury investment will remain stable over the long term. As a result, investors interested in these ETFs must be aware of their risks.