Dividend Investing: 5 ETFs for Income

February 24th at 11:53am by Tom Lydon

Many investors are venturing outside safer bonds to boost income but they need to be careful when stretching for yield with exchange traded funds, as with any investment.

ETFs that specialize in dividend stocks and high-yield bonds have been very popular in a low-rate environment, and the Federal Reserve has pledged to keep short-term rates near zero until at least late 2014. [High-Yield Bond ETFs See Record Inflow]

Still, dividend and junk bond ETFs are more volatile than safer bonds, so investors need to consider the risks. [No Free Lunch: The Risks of Dividend ETFs]

Yields on the 10-year Treasury note dropping back below 2% this week is a reminder of the nearly invisible rates on offer in money market funds and CDs. [Low Fees, Yields Drive Interest in Bond ETFs]

Here are five ETFs across several asset classes paying decent yields that investors may consider:

  • ALPS Alerian MLP ETF (NYSEArca: AMLP), yield 5.7%: Master Limited Partnerships, or MLPs, came out in the 1980s to promote energy infrastructure investments. The companies enjoy tax benefits and pay out most of their net income to investors, typically on a quarterly basis. [MLP ETFs Attract Yield Hunters]
  • PowerShares Preferred Portfolio (NYSEArca: PGX), yield 6.7%: Preferred shares have been outperforming for most of 2012, especially because of their high dividend yields. These ETFs have high concentrations in financial companies. [Preferred Stock ETFs]
  • iShares iBoxx High Yield Corporate Bond (NYSEArca: HYG), yield 6.6%: Low defaults and an attractive yield relative to Treasuries have investors piling into junk bond ETFs this year. [High-Yield Bond ETFs See Record Inflow]
  • PowerShares CEF Income Composite Portfolio (NYSEArca: PCEF), yield 7.9%: The ETF’s tracking index includes closed-end funds that invest in taxable investment grade fixed-income securities, taxable high yield fixed-income securities and others that utilize an equity option writing strategy.
  • Utilities Select Sector SPDR (NYSEArca: XLU), yield 4.4%: After outperforming in 2011, the ETF is actually in negative territory this year despite the roughly 9% gain in the S&P 500. “Investors holding XLU have historically received generous dividends quarterly, and the fund has generally moved in the same direction as the overall market, albeit with smaller gains and retreats,” Morningstar says. [Sector Rotation Favors Riskier ETFs]

PowerShares Preferred Portfolio


The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.