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Philip van Doorn

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March 27, 2021, 1:55 p.m. EDT

10 highest-yielding dividend-stock ETFs for a low-rate world

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By Philip van Doorn

Federal Reserve Chairman Jerome Powell this week said the central bank will “provide the economy the support that it needs for as long as it takes.”

That means low interest rates are likely to persist, keeping a lid on income-producing investments.

A way to get ahead is with dividend stocks and the exchange traded funds that hold them. Below is a list of U.S. ETFs with the highest dividend yields — they range from 4.9% to 9.8%.

Mark Grant, the chief global strategist for fixed income at B. Riley Financial, wrote in his “Out of the Box” email March 22 that, with inflation at 1.68% last month, “you have to beat that rate to get any kind of ‘real return,’ or you are just playing mahjong” with inflation and the Federal Reserve.

With bond yields prohibitively low, he favors closed-end funds and exchange traded funds to meet that income objective. He warned that investors must do their homework to select the right ones.

ETFs are simpler to analyze than closed-end funds, especially ETFs with diversified portfolios.

Focusing on income, not growth

There’s a difference between investing for growth and investing for income. The objective of an income portfolio is not to beat the total return of a growth index. It is for income and capital preservation.

The stock market crash in March 2020 serves as an example of holding quality stocks for the long term. Regardless of how long recoveries take, if you are holding shares of companies that generate sufficient cash flow to cover their dividends, you can make money while riding out the volatility.

Dow Inc. /zigman2/quotes/203121064/composite DOW +1.33% is a case in point. At the end of 2019, the stock closed at $54.73 and the company was paying a quarterly dividend of 70 cents a share, for a yield of 5.12%. Through March 23, 2020, the stock had dropped 51% to $26.58. The company didn’t cut the dividend and its quarterly free cash flow has easily covered the payout since the Covid-19 crisis began. And the stock closed at $60.75 on March 23, 2021.

It’s obvious that the right thing for shareholders of Dow was to ride out the storm, but many investors didn’t have the stomach for it. Taking this idea further, at the close on that dark day of March 23, 2020, the yield on Dow’s shares had risen to 10.5%. The market had given patient investors an opportunity to lock in a very high yield.

All of this holds true for dividend stock ETFs, especially ones with high yields.

Highest-yielding dividend-stock ETFs

A query of FactSet data yielded a list of 66 U.S. ETFs that “weight stocks by dividends and/or seek high dividend yields.”

An advantage of ETFs is that they are easy to trade. You can buy or sell at any time when the stock market is open. Open-ended mutual funds allow you to sell your shares back to the fund company only once a day at the market close.

An open-ended mutual fund’s share price is its net asset value (NAV), which is the sum of the market values of its assets divided by the number of shares. It’s a fund’s book value.

ETFs have NAVs too, but also their own share prices which diverge from the NAV. Grant wrote that when analyzing closed-end funds and ETFs, he says “no thank you” if the share price is at a premium to the NAV. But while some closed-end funds can trade at high premiums to NAV, most of the dividend-stock ETFs listed here trade for small premiums or discounts.

/zigman2/quotes/203121064/composite
US : U.S.: NYSE
$ 60.74
+0.80 +1.33%
Volume: 0.00
Jan. 14, 2022 4:00p
P/E Ratio
7.87
Dividend Yield
4.61%
Market Cap
$44.92 billion
Rev. per Employee
$1.44M
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