The hunt for dividend yield can be tough. Focus too much on yield and you could end up owning something that's too risky. Concentrate on investments that are too safe, and you might fall short of your income targets. To help you make the most from your income portfolio, our Motley Fool contributors scoured the market for what they believe are the best high-yield ETFs to buy. Read on to see if these investments are right for you.
SPDR Nuveen S&P High Yield Muni Bond ETF
Todd Campbell: If you're looking for yield, you shouldn't overlook the potential opportunity offered by high-yielding municipal bonds.
Municipal bonds can offer federal tax-exempt income that can be a boon at tax time, and recovering tax receipts tied to a pickup in home values and construction is improving the odds that these bonds won't default.
One high-yield municipal bond ETF to consider is the SPDR Nuveen S&P High Yield Muni Bond ETF (NYSEMKT:HYMB). It's got a 12-month yield of 4.38% and charges a fairly low 0.45% expense ratio, which can mean more money in your pocket.
The ETF's solid yield and tax-preferred status is alluring, but investors should remember that this isn't a risk-free investment. Bonds can head lower when interest rates rise or the economy stumbles. So make sure you approach your income portfolio holistically. Municipal-bond ETFs make the most sense as part of a diversified income portfolio, so make sure your eggs don't all end up in high-yield bets.
Alerian MLP ETF
Matt DiLallo: Investors looking for a generous income stream should consider the Alerian MLP ETF (NYSEMKT:AMLP). This exchange-traded fund invests in master limited partnerships, or MLPs, that earn the bulk of their income from transporting, storing, and processing oil and gas. Unlike commodity price-exposed producers, MLPs generate the majority of their income from fees, which provides rather stable income, the bulk of which gets passed through to investors. As a result, the Alerian MLP ETF's current yield is a very generous 7.7%.
The fund holds 26 MLPs at the moment, though its top-10 holdings account for nearly 70% of the total. That said, these are the cream of the crop. For example, its top two holdings are MLP stalwarts Magellan Midstream Partners (NYSE:MMP) and Enterprise Products Partners (NYSE:EPD). Fee-based assets are the foundation of both companies, enabling them to derive 85% of their gross margin from stable fees. Further, both have solid investment-grade credit ratings and retain a substantial portion of their cash flow to fund growth projects. Because of that rock-solid foundation, both companies have a long history of distribution growth, with Enterprise's payout increasing for 48 consecutive quarters while Magellan recently raised its distribution for the 57th time since its IPO.
While investors could just invest in individual MLPs, the Alerian MLP ETF has several benefits over owning MLPs directly. Not only do investors get broader diversification, but the ETF sends investors a 1099 for tax reporting purposes instead of a Schedule K-1, which means it can go into an IRA. That said, investors do have to pay up for these benefits, with the ETF's gross expense ratio currently 0.85%. However, for those who want to hold a portfolio of high-yield MLPs and not have to deal with a bunch of K-1s come tax time, the fee could be well worth it.
iShares U.S. Preferred Stock ETF
Sean Williams: If you're looking for a high-yield ETF to bolster your income right now, I can't think of many reasons why the iShares U.S. Preferred Stock ETF (NASDAQ:PFF) shouldn't be front-and-center on that list.
Preferred shares are a hybrid mix between owning stock and buying bonds. Preferred shares offer the yield of a bond without as much volatility as stocks, but they also offer the chance for share price appreciation like a stock, albeit to a lesser degree than buying individual stocks. The result is that you typically wind up with an ETF that has the potential to grow steadily over time, while also providing income that's two or three times higher than what you'd get investing in an index fund. As icing on the cake, preferred shareholders are in line ahead of common stockholders when it comes to getting paid dividends.
What makes the U.S. Preferred Stock ETF so attractive is that it's comprised of 293 different preferred stocks, with a prime focus on the U.S. and U.K., and a heavy tendency to lean toward the financial sector, which has historically been home to some of the most consistent dividend payers. If you believe the financial sector is on solid footing – and it's tough not to believe so with the industry boasting substantially more capital than it did a decade ago – then this high-yield ETF could be perfect for you.
One of the biggest risks for the U.S. Preferred Stock ETF is rising interest rates, with preferred stock and interest rates having an inverse relationship. However, with the U.S. economy mired in slow growth, the Fed's hands continued to be tied on lending rates. Looking years out, it doesn't appear as if lending rates will be rising substantially anytime soon, which should bode well for the iShares U.S. Preferred ETF.
Finally, this high-yield ETF has a management expense ratio of just 0.47%, which is a pretty reasonable price to pay for the management of 293 holdings and a 5.6% yield. You'd probably struggle to find a more consistent high-yield income ETF.