Three Overlooked High-Yield ETFs

Includes: HYD, JNK, PFF
by: Matthew D. McCall

Investors have an opportunity to invest in ETFs that not only offer upside potential through capital appreciation, but also above average dividends. Whether you are a young or old investor, the thought of a regular sizable dividend payment is attractive.

Here are three ETFs that I believe will outperform the market along with a high dividend yield.

  1. SPDR High Yield Bond ETF (NYSEARCA:JNK) - Invests in corporate high yield (junk) bonds and pays out a monthly dividend that equates to an annual yield of 13%. Junk bonds and other risky assets remain undervalued and as the economy comes out of the recession pricing will move back to normal. JNK should move higher in value and continue to pay its monthly dividend.
  2. iShares S&P US Preferred Stock ETF (NYSEARCA:PFF) - Invests in preferred shares of companies that are mainly in the financial sector. The annual dividend yield is 11% and the ETF has more than doubled off the low of March after money came back into the financial stocks. PFF is a great way to participate in the financial sector without taking the risk of an individual stock and along the way collect a sizable dividend.
  3. Market Vectors Barclays Municipal High Yield ETF (NYSEARCA:HYD) - The ETF invests the majority of its assets in high yielding (junk) municipal bonds with about 25% in investment grade bonds. According to the Van Eck website the ETF currently has 30-day SEC yield of 7.16%, which when compared to taxable bonds is even more attractive. If you fall into the 28% tax bracket the tax equivalent yield is 9.94% and as high as 11.02% if you are in the 35% tax bracket. I feel there is more upside in the municipal bonds and that the majority of the high yielding bonds are safe because the federal government will back them up if need be. Whether you agree me that thought or not, I believe it is reality.

While the first two ETFs are great for a tax deferred account, HYD is ideal for a taxable account and investors in a high tax bracket.

Disclosure: Long JNK at time of publication.