When I was younger, I remember watching a show called The New Treasure Hunt. A contestant would pick from a group of 30 large prize boxes, and the host would clown around with gags the box had in it before revealing the prize. It might have been a donkey. It might have been ..."$25,000"!
Bond yields stink right now, and some think a bond bubble is on the horizon. Smart investors may want to go on their own treasure hunt, rebalancing their diversified portfolios by shifting capital from bonds into other income-producing securities, where they can reinvest the income for compounded growth.
Scoring great dividends
Dividend ETFs can be a great way to accomplish this, as they are traditionally cheaper than actively managed mutual funds. The simple route is to stick with the big players in the dividend ETF area: SPDR S&P Dividend (NYSE: SDY ) and iShares Dow Jones Select Dividend (NYSE: DVY ) . These ETFs have yields of 3.4% and 3.7% respectively, which is well above the S&P 500's yield of 1.95%.
However, investors who are willing to dig a little deeper can find even better yields without necessarily increasing risk substantially. By favoring certain sectors over others and including global stocks as well as U.S. dividend payers, you can broaden your dividend exposure and earn some extra income as well.
Branching out
I own four ETFs that pay great dividends. On the international side, iShares Dow Jones International Stock (NYSE: IDV ) pays a yield of 4.43%. I like the fact that even though financial stocks sometimes dominate global dividend ETFs, financials make up only around 20% of the fund's assets.
WisdomTree Equity Income (NYSE: DHS ) has a 3.95% yield, with broad sector diversification. It owns stocks among the top yielding large companies in the U.S., and its index is weighted by total dividends paid. That's a difference from many market-cap-weighted ETFs. The top 10 holdings are all big brand-name companies offering safety, and many have a long history of increasing dividends.
iShares S&P Global Utilities (NYSE: JXI ) focuses on the utility industry, which has historically paid healthy dividends. It pays 4.10%, and is diversified across the globe. Although domestic utilities are known for their safety, China, India, and other emerging countries are seeing big growth, even in infrastructure plays like utilities. A little kick on the capital gains side over the long term can help add to a nice yield.
Finally, telecom stocks also have a reputation for safety and strong dividends. An easy way to get them is through the Telecom HOLDRs (NYSE: TTH ) . I don't hear any line static with a 3.65% yield. The ETF has rallied lately on investor interest in the sector, and you'll find plenty of brand-name companies in the mix.
Beating the bubble
If bonds worry you, you have many choices to boost your income. Diversified dividend ETFs are a cheap way to gain broad exposure with limited risk.
The advantage is that you can do this research, because the answers are not hidden inside pretty boxes with a game show host seeking to humiliate you when you win..."a sock puppet!"
If ETFs aren't your thing, there are lots of high-paying individual stocks to choose from. Find the best by clicking here to get the Motley Fool's free report, 13 High-Yielding Stocks to Buy Today.
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