Dividend, REIT and High-Yield ETFs for Income

October 8th at 6:00am by Tom Lydon

Income generating exchange traded funds are the hot spot in 2012. Investors have flocked to them in droves and bid up prices, but there are still pockets of the market that offer yield as interest rates remain grounded.

“It is hard to find bargains in this market for dividend stocks,” Josh Peters, editor of Morningstar’s DividendInvestor newsletter, said in a report. “But if interest rates stay low, they continue to be the best game in town.”

The following four areas of the market are offering conservative investors a place to park capital.

Dividend investing is the oldest known trick to gain an income stream while getting exposure to shares of large, well-established companies. The iShares Dow Jones Select Dividend Index (NYSEArca: DVY) yields 3.6% while the Vanguard Dividend Appreciation ETF (NYSEArca: VIG) yields 2.16%. Both ETFs are well-established and have healthy assets under management. [Dividend ETFs: Look Before You Leap]

Real Estate Investment Trusts, or REITs, offer exposure to the slowly rebounding real estate sector of the market. These investments in shopping malls, apartment complexes, offices, and industrial facilities are a barometer of economic activity, and for the past three years real-estate mutual funds have posted a total annualized average return of around 20%, reports Jonathon Burton for MarketWatch.

Strong management and diverse geographic areas are key, along with a solid dividend track record. The iShares Dow Jones U.S. Real Estate Index Fund (NYSEArca: IYR) is up 33% this year. SPDR Dow Jones REIT ETF (NYSEArca: RWR) has gained 31%. [ETF Spotlight: Multi Asset Real Return]

Emerging markets have become a staple in most portfolios, and they are one of the best ways to gain access to fast growth in a time when developed markets have sputtered, Burton reports.

“This is a theme that’s only now getting started,” Jose Morales, chief investment officer at Mirae Asset Global Investments in New York, said in the article.

The iShares MSCI Emerging Markets Index Fund (NYSEArca: EEM) has a yield of 2.26% and is one of the largest emerging markets ETFs. Vanguard Emerging Markets ETF (NYSEArca: VWO) has a 5% yield and around $53 billion in assets under management. Dividend focused funds also track overseas companies with a healthy yield, so that investors can get overseas exposure with an income stream that is usually higher than those of U.S. domiciled companies. [Emerging Market Dividend ETFs: How to Choose the Right Fund]

High yield corporate bonds are a corner of the market that has appealed to investors especially with the advent of the ETF. The risk factor is higher with junk bonds, but with an ETF, the “pinch” is not so harsh should a company default.

“With yields averaging just over 6%, sub-investment-grade corporate bonds are attractive compared with the 10-year Treasury note and carry less risk than they did in the aftermath of the 2008 financial crisis,” Burton wrote.

ETFs such as SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) offer higher yields at 6.66% and the iShares iBoxx $ HY Corp Bond Fund (NYSEArca: HYG) offers a 6.32% yield. [High Yield ETFs Climb to New Highs as Treasuries Languish]

Tisha Guerrero contributed to this article.

Full disclosure: Tom Lydon’s clients own EEM, DVY, JNK and HYG.

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.