- Dividend ETFs have risen to the point where their yields are no longer offering an attractive income stream.
- Searching for unconventional dividend indexes can lead to better returns and bigger income streams.
- Asset class diversification amongst MLPs, REITs, and common equity can enhance these factors as well.
Dividend ETFs come in all shapes and sizes these days, but finding one that is truly unique is harder than it seems. All of the largest and most well-established funds are based on uninspiring benchmarks that have risen to the point where their yields barely scratch 3% annually.
That's certainly nothing to write home about when you are constructing a portfolio to deliver sustainable income. In addition, most conservative income investors are concerned about their ETFs holding up under the rigors of interest rate fluctuations and stock market volatility. This is serious money that you can't play around with if you are in retirement or working on building your nest egg to make it through your golden years.
Traditional dividend index funds can make solid foundations for equity exposure, market correlation, and modest yield. However, they may not have everything you need to satisfy the craving for above-average income and asset class diversification. To enhance those factors within your portfolio, an innovative dividend approach may be justified.
One ETF that has quietly pulled away from the pack of generic equity-income competitors over the last year is the Global X Super Dividend U.S. ETF (NYSEARCA:DIV). This fund tracks the INDXX SuperDividend U.S. Low Volatility Index that tracks the performance of 50 equally-weighted common stocks, MLPs, and REITs that rank among the highest-dividend paying securities in the United States. In addition, to be included in DIV, these securities have to be considered to have lower relative volatility than the market.
This unique combination of assets has proved to generate a very strong 30-day SEC yield of 5.78%. Furthermore, dividends from DIV are paid monthly to shareholders, which may be an attractive quality for those that are seeking a more consistent stream of income than typical quarterly distributions.
Because DIV has only been in existence approximately 17 months, there is not a long track record of performance from which to measure its success against other benchmarks. However, according to my research, this ETF has beat all unleveraged dividend equity-focused ETFs over the last year. A comparison of DIV to the iShares Select Dividend ETF (NYSEARCA:DVY) and Vanguard High Dividend Yield ETF (NYSEARCA:VYM) shows just how strong this outperformance has been.
DIV has really broken away from the pack in 2014 because of its exposure to REITs, MLPs, utilities, and energy stocks. These sectors came into the year relatively undervalued, and have shown remarkable strength, as investors have piled into these defensive areas of the market as interest rates have fallen.
I like the unique aspect of exposure to both real estate investment trusts and master limited partnerships in the DIV portfolio, because they help boost the yield and diversify the asset class spectrum. This is especially important when the portfolio is more concentrated with only 50 total securities.
The unique style of this ETF may lend itself towards starting out as a tactical position within the context of a balanced income portfolio. Ultimately, as price trends develop and more performance data is available, it may even work its way into a core holding with the goal of high monthly income and capital appreciation.
It's also worth noting that DIV has a sibling ETF with a global slant in the Global X Super Dividend ETF (NYSEARCA:SDIV). This fund takes a similar approach to selecting high-yielding equity securities in both the U.S. and abroad. This includes exposure to developed and emerging market nations.
Despite the relatively small asset base of $163 million, DIV has been a quiet performer with strong fundamentals that deserves to be on your equity income watch list. As always, I recommend that you place a trailing stop loss or other sell discipline on this ETF, if you do decide to dip a toe in the water. This ensures you define your risk, and guards against the potential for a sell-off in the market.
Additional disclosure: David Fabian, FMD Capital Management, and/or clients may hold positions in the ETFs and mutual funds mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell, or hold securities.