The Federal Reserve seems satisfied with the progress in its battle against inflation. In fact, the central bank, after cutting short-term rates at last month's meeting by 0.5%, seems set to further lower them.
For income-oriented investors, that means lower yields on future fixed-income purchases and savings accounts. However, you can find exchange-traded funds (ETFs) which focus on investing in equities that pay high dividend yields.
Here are three options for those seeking high yields from equity ETFs.
The iShares Core High Dividend ETF (NYSEMKT: HDV) consists of "high-quality" U.S. dividend-paying stocks. The ETF invests in 75 companies that have strong financial characteristics. In other words, companies with the financial health to withstand adverse events like an economic downturn.
The ETF has the largest exposure, about 27%, to the energy sector. While those stocks can have volatile results depending on oil and natural gas prices, that's followed by healthcare's 18.3%, consumer staples' 18.2%, and utilities' 11.2%. These three sectors tend to have stable results no matter what's happening with the economy.
With only 75 holdings, certain individual stocks have large weightings in the fund. That means they could have a disproportionate effect on the ETF and your return. ExxonMobil, with a 10.3% weight, is the largest individual stock holding. The second biggest is another energy company, Chevron, which has a 6.6% weighting. Two healthcare companies, Johnson & Johnson and AbbVie, follow with 6.4% and 6% weights, respectively.
The iShares Core High Dividend ETF tracks the Morningstar Dividend Yield Focus Index. Since it invests passively, the ETF has a low 0.08% expense ratio. The ETF's 30-day yield after expenses was 3.6%. By contrast, the SPDR S&P 500 ETF Trust has a 1.2% yield on that basis.
While investors think about small capitalization having higher volatility and lower dividends than their larger-cap peers, there's an ETF that seeks to minimize risk and maximize dividends. The Invesco S&P SmallCap High Dividend Low Volatility ETF (NYSEMKT: XSHD) invests at least 90% of its funds in stocks making up the S&P SmallCap 600 Low Volatility High Dividend Index. The underlying index consists of 60 stocks in the S&P SmallCap 600 Index that have higher dividend yields and lower volatility than the entire small-cap index over the last year.
The portfolio has 58 stocks. It has almost a quarter of its assets invested in the financial sector. Consumer staples, utilities, and real estate follow with 13.2%, 13.1%, and 12.6%. The four sectors combined account for 63.6% of the assets.
The Invesco S&P SmallCap High Dividend Low Volatility ETF has a generous 6.5% yield over the last 30 days. The ETF has a 0.3% expense ratio.
Investors looking for exposure to equities outside of the United States will find that iShares International Select Dividend ETF (NYSEMKT: IDV) fits the bill. The ETF invests in larger companies in developed markets.
The 99 stocks include companies like British American Tobacco, TotalEnergies, and Vodafone Group. The ETF has the largest exposure to the financial sector, 31.4%, followed by utilities (16.7%), and communications (11.7%).
The iShares International Select Dividend ETF tracks the Dow Jones EPAC Select Dividend Index, which holds high-dividend stocks in Europe, the Pacific region, Asia, and Canada. The iShares ETF has a relatively high 0.49% expense ratio. However, after deducting this amount, it has a 5.9% dividend yield.
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*Stock Advisor returns as of October 7, 2024
Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbbVie and Chevron. The Motley Fool recommends British American Tobacco P.l.c., Johnson & Johnson, and Vodafone Group Public and recommends the following options: long January 2026 $40 calls on British American Tobacco and short January 2026 $40 puts on British American Tobacco. The Motley Fool has a disclosure policy.