If you are seeking high income in your portfolio, but don't want to deal with the guesswork involved with picking individual stocks, maybe an exchange-traded fund, or ETF, is right for you. ETFs trade on the major stock exchanges, making them easy to invest in, and they spread their money among a variety of stocks with a similar focus or goal, much like a mutual fund. They are the best of both worlds.
We asked three Fool analysts which high-yielding ETFs they recommend, and here is what they said.
Selena Maranjian: You might think of income-producing investments as best for those in retirement, but think again. They can sit in your portfolio and generate lots of cash that you can then deploy into new investments. One ETF that can deliver significant income is the iShares US Preferred Stock ETF (PFF -0.39%). As you can probably tell, it holds shares of preferred stock, which is more like debt than stock, really. Preferred stock often confers no voting rights and does not appreciate much in value over time, but instead offers hefty fixed dividend payouts. This ETF recently yielded nearly 7%!
There are plenty of reasons to consider this ETF for your portfolio, beyond the dividend itself. For one thing, it offers diversification, instantly providing preferred stock of several dozen companies. Its expense ratio, or annual fee, is just 0.47%, far below those of most mutual funds, and also less than many ETFs. Its net assets top $11 billion, reflecting that it is quite established. Indeed, it has been around since 2007 and has averaged a total return of 8.4% annually over the past five years.
The ETF's portfolio recently had about 330 holdings, which were concentrated in the financial industry. About 80% of its holdings are U.S.-based, with another 13% from the U.K., adding an extra measure of diversification.
Matt Frankel: I have often written in favor of real estate investment trusts, or REITs, such as Realty Income and Equity Residential as excellent ways to get strong growth and income in your portfolio. In that vein, my favorite high-yielding ETF is the Vanguard REIT ETF (VNQ).
One of the main reasons I like investing in REITs (as opposed to buying investment properties) is the diversification and stability they provide. Instead of worrying about one property, you spread your money among thousands.
By that logic, an ETF that invests in all of the major REITs should be even better. You get excellent exposure to all kinds of properties, including healthcare, industrial, office, residential, and retail. The ETF holds 143 different REITs, and only one of them makes up more than 5% of the fund's portfolio.
The ETF has an extremely low 0.10% expense ratio, pays a handsome dividend yield of about 3.5%, and has a pretty impressive track record of growth. Since its inception in 2004, the fund has averaged a total return of about 8.8% per year, beating the S&P 500 over that period.
Rental real estate can be an excellent long-term investment, and the Vanguard REIT ETF is a smart way to play the sector.
Dan Caplinger: Exchange-traded funds that focus on dividend stocks have become extremely popular, but different dividend ETFs focus on different things. The Vanguard High Dividend Yield ETF (VYM) specifically hones in on high-yielding dividend stocks, but it does not simply go down the list and buy those with the absolute highest dividend payments. Instead, it emphasizes quality first, owning many of the largest and best-known companies in the market with an eye toward picking stocks that pay good dividends now and should sustain those dividends well into the future.
The best thing about the Vanguard High Dividend Yield ETF is that it has both outperformed and proven less volatile than the S&P 500 over the past five years. That's a testament to how dividend stocks can reduce choppiness in your investing even as you capture solid returns from their income and growth potential. Moreover, because the ETF focuses on common stocks, it makes a good supplement to holdings in other smart ideas, such as preferred-stock ETFs or ETFs that hold real estate investment trusts. Overall, focusing on yield is important to many investors, and an ETF like the Vanguard High Dividend Yield ETF can help you do so prudently.