Of all the dividend ETFs out there, these 4 are core holdings.
The advent of the ETF has made it easier than ever before to construct a dividend-heavy portfolio. There are so many dividend ETFs available that it’s possible to customize a dividend-driven portfolio that fits your exact criteria for risk, dividend yield, and expected long-term capital gains.
The downside of infinite ETF choice is, well, infinite ETF choice. There are just so many possibilities out there, and so many different ways to construct a portfolio, that one can get lost and confused. Just like in the old days, when you were advised not to load up on too many mutual funds, you have to be careful not to load up on too many ETFs.
So I decided to find four dividend ETFs that I would be eternally happy with – ETFs that would pay high dividends and give me potentially modest capital gains, and that if I was never able to trade out of them, I’d be pleased to hold them no matter what.
1. iShares Core High Dividend ETF (NYSEARCA:HDV)
iShares Core High Dividend ETF (NYSE:HDV) is my first choice. It tracks the Morningstar Dividend Yield Focus Index, which holds 75 dividend-paying stocks that meet some interesting criteria. The companies must have an “economic moat”, which is “something inherent in their business model that rivals cannot easily replicate” and that have the potential to earn above average returns on capital. It has all the big names you’d expect in a large cap dividend fund, such as AT&T (NYSE:T), Wells Fargo (NYSE:WFC),and Johnson & Johnson (NYSE:JNJ). It’s a nice safe choice and yields 3.05%.
2. iShares US Preferred Stock ETF (NYSEARCA:PFF)
iShares US Preferred Stock ETF (NYSE:PFF) is a financials-heavy portfolio of preferred stocks issued by US companies. Preferred stocks have several advantages over common stocks. They are higher in the capital stack, so in the event of a company default, preferred stock holders will get repaid before common holders do. Common dividends must also be suspended prior to preferred stock. Also, preferred stock tends to trade more like bonds, so they usually move in a limited trading range, offering low volatility, but high yields. It yields 6.56%, and holds preferred stocks from all the major banks and financial services companies.
3. PowerShares S&P 500 BuyWrite (NYSEARCA:PBP)
PowerShares S&P 500 BuyWrite (NYSE:PBP) uses one of my favorite strategies to generate distributions for shareholders. It writes covered call options against long positions in S&P 500 stocks. The managers are content to collect premiums by selling call options on the stocks. If they get called away, so be it. They just buy the stock back and sell another call against it. If they hold onto the stock, that’s fine, too! It’s not great if the market gets clobbered, because they are writing calls and holdings stocks all the way down, but the premiums collected act as a hedge on the downside. It yields 6.93%.
4. Guggenheim Multi-Asset Income ETF (NYSEARCA:CVY)
Finally, I would choose Guggenheim Multi-Asset Income ETF (NYSE:CVY). This ETF invests across all asset classes in an effort to generate income from the entire economy. Financials are a bit heavier than I’d like, representing 37% of the ETF, with energy at 19%. But utilities are there at 8.5%, consumer discretionary at 8%, materials at 7.5%, and so on down the line. I like the diversification here. Its 150 holdings generate a 4.72% yield.
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