Invstors are hungry for yield, and what better way to access yield-paying investments than through an ETF that holds a number of underlying assets?
Below I have identified four ETFs with a dividend yield above 10%. I ask: Are these yields too good to be true?
Market Vectors Uranium & Nuclear Energy ETF (NLR)
The investment seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the DAX global Nuclear Energy Index. The fund normally invests at least 80% of its total assets in equity securities of U.S. and foreign companies primarily engaged in various aspects of the nuclear energy business.
PowerShares S&P 500 BuyWrite Portfolio (PBP)
The investment seeks investment results that generally correspond (before fees and expenses) to the price and yield of the CBOE S&P 500 BuyWrite Index. The fund normally invests at least 80% of total assets in common stocks of the 500 companies included in the S&P 500® Index and writes (sells) call options thereon. The underlying index measures total returns of a theoretical portfolio including the S&P 500 Index stocks on which S&P 500 Index call options are written (sold) systemically against the portfolio through a buy-write strategy.
iShares FTSE NAREIT Mortgage Plus Capped Index Fund (REM)
The investment seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the FTSE NAREIT All Mortgage Capped Index. The fund invests at least 90% of its assets in securities of the index and in depositary receipts representing securities of the index. The index measures the performance of the residential and commercial mortgage real estate, mortgage finance and savings associations sectors of the U.S. equity market.
PowerShares KBW High Dividend Yield Financial Portfolio (KBWD)
The investment seeks investment results that correspond (before fees and expenses) generally to the price and yield of an index called the KBW Financial Sector Dividend Yield Index. The fund invests at least 80% of total assets in securities of financial companies. It normally invests at least 90% of total assets in the securities that comprise the Underlying Index. The Underlying Index is calculated using a dividend yield weighted methodology that seeks to reflect the performance of approximately 24 to 40 publicly listed financial companies that are principally engaged in the business of providing financial services and products.
Are These Dividends Sustainable?
That's the million dollar question. High yields are great, but one must know if they are caused by a special distribution or the expectation of future distribution cuts.
To help readers begin to evaluate the sustainability of these yields, I first dug into the websites of each ETF provider to see if the distributions were primarily 'return of capital' (ROC). (Some ETF providers boost a fund's perceived yield by simply handing back a portion of an investor's original investment.)
While some would disagree, my opinion is that less ROC is better because I don't need to pay someone to hand me back my original investment. It appears that the distributions do not include return of capital. (In 2009 about 14% of REM's distribution was considered ROC, but none since then.) I did some searching to find this information, but, since the data were sketchy, I suggest you verify it with your financial advisor who can contact the ETF providers directly.
Next, I mapped the historical dividend yield (%) and historical dividends ($) paid for each of the ETFs (see below). KBWD has a shorter track record, and thus only the ETF's historical dividends are displayed.
In my opinion, REM is the most consistent of them all, as its yield has hovered around the 10% mark since 2009.
Note: NLR yield has recently spiked partly due to a decline in the ETF price. While this may be a buying opportunity for a deep value investor, for my purposes (yield), the market is telling me the distributions may be at risk. Also, distributions are annual and have varied widely.
Note: The yield on PBP has been fairly consistent since late 2010. However, it appears that recent yield data has been boosted by two out of the ordinary distributions.
Note: While distributions fell during the financial crisis, they have remained consistent ever since, except for the 2011 year-end distribution.
Note: Distributions have been fairly consistent, but the track record is short.
Data sources: Ycharts, Finviz, ETF websites.
Disclaimer: This is not advice. While Plan B Economics makes every effort to provide high quality information, the information is not guaranteed to be accurate and should not be relied on. Investing involves risk and you could lose all your money. Consult a professional advisor before making any investing decisions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.