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5 ETFs for Dividend-Hungry Investors

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Throughout their existence, exchange-traded funds have always followed popular investing trends in the overall market. With so many investors focused on getting as much income as possible from their portfolios, it only makes sense that ETF managers have moved toward producing as much income as possible for their shareholders.

In fact, some ETFs focus exclusively on dividend-paying stocks, including Vanguard High Dividend Yield (NYSE: VYM  ) and Vanguard Dividend Appreciation (NYSE: VIG  ) . But not all high-income ETFs conveniently include the "dividend" label in their name. To get the top-paying ETFs, you need to do a little digging. Let's take a look at five ETFs that have yields that will make any income investor happy.

1. iShares FTSE NAREIT Mortgage Plus (NYSE: REM  )
Just as the place to find top yields in stocks is in the mortgage REIT sector, this ETF, which focuses on mortgage real estate investment trusts, passes through the healthy dividends of its holdings on to ETF shareholders. Currently, the ETF has an SEC yield of 12.7%, and its 12-month yield is only a little lower at 11.7%.

Holdings for the ETF include all the most popular mortgage REITs, including Annaly Capital and American Capital Agency. But you'll also find some other financial stocks that are linked to the mortgage industry but which have much lower yields than the average mortgage REIT. For pure mortgage-REIT coverage, you might prefer to go with the brand new ETF Market Vectors Mortgage REIT, which doesn't report a yield yet but which owns most of the same high-yielding mortgage REITs without the other stocks pulling down the average dividend.

2. ALPS Alerian MLP (NYSE: AMLP  )
Another popular place to find high yields lately has been from master limited partnerships. These investments, which usually focus on energy and natural resources, not only pay out high distributions but also have some preferential tax treatment from those distributions. With a few MLPs paying double-digit percentage yields and many more in the high single digits, it's no surprise that this ETF weighs in with a 6.5% 12-month yield.

Holdings include the popular MLPs Enterprise Products Partners and Kinder Morgan Energy Partners. And with quarterly dividends, the ETF does a good job of getting the income its investments generate out to shareholders regularly.

3. PowerShares CEF Income Composite (NYSE: PCEF  )
To find more income, this ETF goes to the closed-end fund universe. These little-followed investments often trade at a discount to the value of their assets, providing bargain opportunities for investors. In addition, many of them borrow money to get leveraged exposure for their portfolios, which can boost income when conditions are favorable. The fund has used its strategy to produce a 9% yield over the past 12 months.

Most of the closed-end funds that this ETF owns focus on fixed-income investments like bonds rather than stocks. However, it also includes closed ends that use options strategies and other novel methods for producing income. Recently, the fund's share price has dropped along with the stock market, but over longer periods, it has tended to be much more stable than the stock market.

4. iShares iBoxx High Yield Corporate Bond (NYSE: HYG  )
Beginning investors may not understand that most of the time, interest rates on bonds are much higher than dividend yields on stocks. But with the Federal Reserve pushing rates down, Treasury yields have fallen below the dividend yield on the S&P 500.

Some high-yield bonds still pay healthy levels of income. This ETF focuses on "junk" bonds whose credit ratings indicate a fairly substantial risk of default. As a result, part of the current SEC yield of 8.2% has to reimburse you for any losses that occur from defaults. But as an alternative to stocks, having some of your portfolio in high-yielding bonds can make sense.

5. PowerShares Preferred (NYSE: PGX  )
Another area to find high dividend yields is in preferred stock. This ETF has produced a 7% yield by investing in preferred shares of many companies, including Citigroup and General Electric.

Preferred stock doesn't have the same upside as common stock, but it also tends to be more stable and pay higher yields. For income investors, a preferred-oriented ETF is a logical choice to consider.

Get paid
With so many ETFs available for investors looking for high yield, you don't have to stick to traditional dividend stocks. These five ETFs actually give you a fairly diversified portfolio that gives you exposure to several different asset classes.

Get some more great ETF ideas in this Motley Fool free special report. You'll find the names of three more strong ETFs along with techniques for finding the best ETFs around.

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter here.

Fool contributor Dan Caplinger likes it when companies show him the money. He owns shares of Vanguard Dividend Appreciation ETF. The Motley Fool owns shares of Johnson & Johnson. The Motley Fool owns shares of Citigroup and Annaly Capital Management. Motley Fool newsletter services have recommended buying shares of Enterprise Products Partners. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy stays hungry, my friend.

Read/Post Comments (2) | Recommend This Article (8)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 06, 2011, at 11:23 PM, MHedgeFundTrader wrote:

    In a matter of weeks, the junk bond market has plummeted from two standard deviation overbought to 1.5 standard deviations oversold. The yield on the ETF soared to 8.7%. Investors have been throwing junk overboard in fear of a new recession or depression that will send default rates on this paper skyward.

    I have seen this movie replay more times than I can remember. During panics like we are in now, junk bonds get sold off to levels that imply insane default rates. At current prices, they suggest that 10% of the outstanding paper out there defaults. In 2008, junk yields hit 25%, forecasting a 30% default rate. What was the actual realized default rate that followed? A scant 1.5%.

    I think we will see another replay this time. Yes, default rates may rise, but are unlikely to exceed 2%. That makes (JNK) a great, ultra high yield alternative for investors unwilling to beat your brains out on a day to day basis attempting to predict these incredibly volatile market moves. And yes, it’s too late to buy the short junk ETF.

  • Report this Comment On October 11, 2011, at 6:02 PM, JSkrivkin wrote:

    HYG monthly dividend has been on steady decline for quite some time. Why is that?

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