If you're looking to boost the income in your portfolio, exchange-traded funds can help you get the job done. But while plenty of ETFs pay decent yields, one ETF offers truly amazing payouts to its shareholders. Below, I'll tell you the secret behind this top-yielding ETF and share some insight into how its strategy can help you with your own investing.
Giving up on bonds
Not so long ago, if you wanted to get income from your portfolio, you first turned to bonds and other fixed-income investments. Most bonds don't offer great prospects for capital appreciation, but much of the time, the income they generate compensates for their lack of growth potential. As a result, bonds have been favored by conservative investors who are more concerned with personal cash flow than with growing their portfolios.
But over the years, interest rates on bonds and similar investments have fallen dramatically. Go to a bank for a CD or buy a Treasury bond, and you'll be lucky to get enough of a yield to match inflation going forward. That has made them much less useful as income-producing investments.
As a result, investors have increasingly turned to stocks and stock funds. In many cases, you can get better yields from dividend-paying stocks than you'll find on bonds -- along with the potential for future growth if stock prices continue to rise.
Dividend ETFs and you
With the rise of various types of ETFs, it was inevitable that fund companies would create dividend-stock ETFs. In fact, investors now have a wide range of dividend ETFs to choose from, using different strategies that emphasize different characteristics.
For instance, iShares DJ Select Dividend (NYSE: DVY ) and Vanguard High-Dividend Yield (NYSE: VYM ) select some of the top-yielding dividend stocks available to boost their yields. But not all ETFs go for the highest yields. Vanguard Dividend Appreciation (NYSE: VIG ) focuses on stocks that have an established track record of paying steadily increasing dividends over time. It doesn't necessarily pick the highest-yielding stocks, but its overall yields are still attractive and are positioned to increase over time.
Can't touch this
To get the ultimate in a high-yielding ETF, though, you have to turn to iShares FTSE NAREIT Mortgage Plus Capped Index (NYSE: REM ) . This ETF sports a sky-high dividend yield of 9.6% -- as much as three times what other dividend-oriented ETFs pay.
The secret to the fund is in its target sector: mortgage REITs. By owning shares of companies like Annaly Capital (NYSE: NLY ) and Chimera Investment (NYSE: CIM ) with their double-digit dividend yields, the ETF boosts its own dividend yield accordingly. And as long as those holdings keep producing healthy dividends, then the ETF should continue to see its yield remain among the top in the ETF universe.
The ETF isn't exclusively composed of mortgage REITs, though. You'll also find shares of banks like Hudson City Bancorp (Nasdaq: HCBK ) . But for the most part, you'll see all the top names of mortgage-REIT players within the portfolio of roughly 50 stocks.
Is it right for you?
Mortgage REITs offer a compelling investment proposition right now. With short-term interest rates at historically low levels, mortgage REITs have never had more favorable opportunities to borrow at rock-bottom cost while reinvesting in longer-term mortgage-backed securities that pay higher yields. The current profits have led to those double-digit dividend yields that so many investors like.
But concentrating too much of your portfolio on mortgage REITs carries big risks. With their particular sensitivity to interest rates, the iShares mortgage-REIT ETF could see losses if rates start to rise. At that point, other dividend ETFs might offer a better combination of current yield and share growth potential.
Regardless of which ETFs you choose, it's becoming increasingly clear to investors that in providing decent income, stocks have taken the lead from bonds. If you're an income-seeking investor who wants to boost the payouts on your portfolio, then dividend-stock ETFs are worth keeping an eye on.
Also, if you like high yields, you'll want to look at 13 names from a free report from Motley Fool expert analysts called "13 High-Yielding Stocks to Buy Today." Join the thousands who have gotten free access to the names of these 13 high yielders. It's as easy as clicking here.
Add the iShares FTSE NAREIT Mortgage Plus Capped Index ETF to your watchlist and track its progress.