With 10-year Treasuries yielding less than 1% and the S&P 500 earning about 1.8%, the search is on for higher dividend yields.
Investors often turn to dividend stocks for higher yields when fixed income isn't cutting it, but that's proven to be a bad move. With many companies cutting or suspending their dividend post-COVID, a lot of investors have turned the other way anticipating further cuts ahead.
But with the economy showing signs of bottoming and investors now hopeful about an economic restart, dividend stocks are coming back into favor again.
After about a year of underperforming, dividend stocks, as measured by the SPDR S&P Dividend ETF (SDY), have beaten the S&P 500 (SPY) by roughly 7% over the past four weeks.
That puts 3-4% yields back in reach by buying large-cap equities. Junk bonds, with the backing of the Fed, have come roaring back to life. They're yielding about 5-6% right now and they've become a decent option for your portfolio in small quantities.
Going For A 10% Yield
There's higher yields and then there's going for the home run swing.
You don't want to add 10% yielders in any significant quantity, but as an addition to a more broadly diversified portfolio, they make some sense. We saw during the bear market that these can fall significantly and rapidly under the wrong conditions, but the environment is starting to look a bit better for them now.
Here are three ETFs worth considering if you want a big yield to add to your portfolio.
iShares Mortgage Real Estate ETF (REM)
Talk about getting hammered! As the bear market deepened and it became clear that mortgage holders were going to start having trouble making their monthly payments, the value of mREITs dove.
REM lost about 70% from peak to valley. Since the early-April bottom, however, it's been a completely different story. REM has gained more than 80% and has significantly outperformed both the real estate sector and the broader market.
With the economy looking like it's preparing to recover over the next year, real estate still looks like a good bet as the income generation potential of REITs improve. Recent share price losses have pushed the yield on REM all the way up to 14%.
While there is further share price appreciation potential here, keep an eye on that yield. It's possible that REITs make distribution cuts in response to the recent COVID damage.
Amplify High Income ETF (YYY)
YYY invests in a basket of closed-end funds, which offer both high yield and often trade at a discount. The fund is more than 80% bonds and consists mostly of riskier loan participations and high yield notes.
As I mentioned up above, high yield bonds have done quite well over the past couple of months and YYY has benefited. It's up nearly 50% since the March bear market lows.
The future success of YYY is likely dependent on the Fed's continued support of financially distressed companies and its ongoing purchases of high yield bond ETFs. So far, it appears like that will continue, so YYY could be a nice income option.
YYY offers a current yield of 10% and has consistently remained in the 8-12% range over its lifetime.
Virtus InfraCap U.S. Preferred ETF (PFFA)
PFFA is a newer fund, so we have less of a history to work with. Like the other funds on this list, it got beaten down hard during the bear market, but has recovered strongly.
PFFA is a broad-based preferred stock fund, which means it generally tends to be less volatile under normal market conditions, but can turn south quickly when things go wonky. PFFA is still down significantly on the year, but has doubled in value since the March bottom.
2020's losses have helped push the fund's yield up to 10%, which is modestly higher than its historical yield in the 8-9% range. It's worth noting that PFFA cut its monthly dividend from $0.19 per share to $0.15 just earlier this year, so the distribution shouldn't necessarily be considered stable. I'd expect that now we're looking at a quicker than expected recovery, the management team will do everything it can to maintain the dividend going forward.
More ETF Research
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