Investing In Dividend ETFs: Want Super Yield? Try These (SDIV, DWX, BP, PG, REM, NLY, AGNC, CIM)

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September 24, 2012 3:47pm NYSE:DWX NYSE:SDIV

Money Morning Staff: With the U.S. Federal Reserve intent on keeping interest rates low until at least late 2014, investing in dividend ETFs (exchange-traded funds) is necessary for income investors who are all but forced to consider asset classes


beyond money market accounts and U.S. Treasuries.

The interest rates on products are now so piddly that investors are all but preconditioned to view either equities or high-yield bonds as the most viable options for generating income.

By virtue of the anemic yields on CDs and Treasuries many investors are left thinking the yields on usual suspect blue chip dividend stocks are great. The 3.3% yield offered by consumer staples giant The Procter & Gamble Co. (NYSE:PG) is viewed as “good.” These days, BP Plc (NYSE:BP) with its 4.6% dividend yield is considered “stellar.”

They’re just two examples, but BP and P&G prove the point that in today’s market “decent” yields are viewed as “great.” That is one reality of today’s low interest rate environment.

Another reality is that the low yield story has been overdone. To borrow from baseball terminology, the low yield story is in the ninth inning.

On the other hand, the still unheralded super dividend theme is still in its infancy. The good news is investors can easily tap into the super dividend story with the following ETFs.

A Double-Digit Dynamo

There are about 1,450 exchange-traded products (ETFs and ETNs) on the market today, but the number sporting dividend yields north of 10% is scant. Try seven and there are myriad problems with six of those funds.

The one that passes the smell test is the iShares FTSE NAREIT Mortgage Plus Capped Index Fund (NYSE:REM).

With a trailing 12-month yield of almost 11.3%, REM is more than worthy of its place in the super dividend conversation. Year-to-date, REM has gained over 20% and that does not include dividends.

There is some risk with REM that investors must acknowledge before jumping in head first.

As Money Morning’s Martin Hutchinson noted earlier this year, companies such as Annaly Capital Management (NYSE:NLY), American Capital Agency (NASDAQ:AGNC) and Chimera Investment (NYSE:CIM) “invest in government guaranteed home mortgages, then fund them through repurchase agreements, earning the spread between short-term and medium-term interest rates.”

Should the Fed decide to raise interest rates, that would be punitive to those stocks and, in turn, REM because that trio combines for 42% of the ETF’s weight.

The good news is the Fed probably will not be raising rates for at least another two years, so long-term investors can enjoy at least that much more time of dependable income and high yields from REM.

Super Dividend ETFs: Emerging From the Shadows

The Global X SuperDividend ETF (NYSEARCA:SDIV) has been around since June 2011, but only recently have more and more investors started to take note of the fund.

That is probably because SDIV crossed the $100 million in assets under management mark a few weeks ago, a watermark many so-called experts point to as a determinant of an ETF’s future prospects.

Arguably, an ETF’s size in terms of assets is nothing more than a superficial metric. What cannot be debated regarding SDIV is its potency for income investors. The ETF sports a 30-day SEC yield of 7.7% and a trailing 12-month yield of almost 7.9%.

Those numbers alone cement SDIV’s status as a super dividend play, but there is more.

The ETF pays a monthly dividend. Quarterly dividends are certainly better than no dividends at all, but this payment methodology is antiquated. It is a relic of the Wall Street of 100 years ago when investors used to have to present their stock certificates to the company or at a bank to receive the dividend. Monthly dividends are a more advanced way of rewarding investors more frequently and can be a boon for those that are building a dividend portfolio to fund retirement.

Investing in ETFs with an International Flair

Amid slowing growth in emerging markets and the Eurozone’s sovereign debt crisis, it goes without saying that investing in some international stocks and ETFs has meant taking on elevated risk this year.

And when an investor incurs more risk, he or she should at least be compensated in the form of a higher yield. International stocks are often superior dividend payers when compared against comparable U.S.-based issues and the SDPR S&P International Dividend ETF (NYSEARCA:DWX) lives up to that billing with a dividend yield of 7.4%.

The largest fund on this list by assets (almost $941 million), DWX is perhaps the riskiest, as well. Conservative sectors telecommunications and utilities combine for almost 45% of DWX’s weight, but financials figure prominently as well with a weight of 18.1%.

In addition to some sector risk, DWX is a mix of developed and emerging markets.

In terms of developed markets, high risk Spain is this ETF’s largest country weight at 16.2% and seven other Eurozone nations are found throughout DWX’s roster.

Bottom line: There is still considerable risk with European equities, but the asset class has also been in rally mode over the past couple of months. Should the European Central Bank make good on its promise to purchase at-risk European bonds, DWX could continue delivering for investors.

That’s why investing in these dividend ETFs is a must in this low interest rate environment.

Written By The Money Morning Staff

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