Money market yields have been falling over the past few months, but that doesn't mean you have to settle for less. Income-generating stocks march to a different beat. Payouts keep widening, sometimes even faster than a stock's upticks.
If you're looking for cash distributions and diversification, you may want to consider income-generating exchange-traded funds (ETFs) to round out your portfolio. Some of the attractive ETFs that can deliver passive income with the potential for some capital appreciation include iShares Core High Dividend ETF (HDV 0.54%), Global X US Preferred ETF (PFFD +0.21%), and Cambria Foreign Shareholder Yield (FYLD 0.52%).
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Key Data Points
iShares Core High Dividend ETF
If you're looking for a steady cadence of passive income, iShares Core High Dividend ETF checks off a lot of the right boxes. It currently yields 3.7%, three times the rate of the S&P 500 (^GSPC +0.40%). It has a long history of strong performance, rising 14% last year, with an annual total return average of nearly 10% since its inception in the springtime of 2011. It's a popular choice, with nearly $11 billion in total assets. It's also an index fund, packing a low expense ratio of 0.08%.
The index it mirrors consists of what is currently 75 high-paying U.S. large caps. Consumer staples and energy stocks make up more than half of the ETF's weighting. It's not a surprise to see many high-yielding tobacco and healthcare stocks in the mix. iShares Core High Dividend ETF won't go up every year, but the largest annual decline in its 14-year history was a 6% slide in 2020.
Image source: Getty Images.
Global X US Preferred ETF
There are more than just common stocks out there cranking out regular dividends. Some companies issue preferred shares. On the surface, preferred stock is pretty cool. The shares tend to command higher yields than common stocks. They are readily available to trade on stock exchanges alongside traditional stocks. True to their name, preferred shareholders have priority in the unfortunate case of a corporate liquidation.
Of course, there's no free lunch. Preferred shareholders don't participate in the ups and downs that accompany a common stock's response to growth and profits. They trade more like bonds, gyrating largely based on interest rate movements and the underlying company's credit quality. However, at the end of a rate-increase cycle -- where most economists thought we were a couple of months ago before the future got fuzzy -- preferred stocks can be a compelling place to be.
Global X US Preferred is one of the largest preferred stock ETFs, with more than $2.3 billion in assets and a reasonable expense ratio of 0.23%. Its 6.4% yield is the highest of the three funds in this list. The ceiling is limited, but unfortunately the same can't be said about the floor. Financial services companies make up the majority of this niche, and in 2022, when the sector stumbled, Global X US Preferred plummeted 20%. But if you can stomach the risks and shortcomings in return for higher yields, this ETF can diversify your asset allocation strategy with a different breed of dividend generation.
Cambria Foreign Shareholder Yield
Cambria operates a couple of funds that look beyond cash distributions in fleshing out their portfolios. Companies that are generating healthy levels of free cash flow can decide to share the wealth with regular dividend payments, but Cambria focuses on "shareholder yield" that also factors in stock buybacks and debt paydowns for a larger portrait of returning money to its stakeholders.
The largest Cambria fund using this strategy is the $1.2 billion Cambria Shareholder Yield (SYLD 0.22%) that focuses on stateside investments. Its current yield is only 2%, so I'm packing a passport here. Cambria Foreign Shareholder Yield uses the same strategy of adding up dividends, stock repurchases, and the drawing down of debt to find the international companies generating the highest shareholder yield. The ETF currently yields a hearty 5.4%, and that's not including the impact of share repurchases and leverage reduction.
Cambria Foreign Shareholder Yield has an expense ratio of 0.59%, more than reasonable for a unique and actively managed fund offering overseas exposure. It currently owns more than 100 stocks, equally weighted so one sinker won't crush your returns. Its three largest country weightings -- Japan, Canada, and Britain -- account for more than half of its value.
There are naturally risks with international investing, including geopolitical concerns and currency swings. Patience can help smooth out the volatility. Cambria Foreign Shareholder Yield's emphasis on companies that are generating free cash flow also helps with its risk profile.
