Unconventional dividend funds can offer generous yields to finance your lifestyle, but there are trade-offs. Make sure you know what they are and confirm that they don’t conflict with your investment priorities.
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The average dividend yield of the S&P 500 is 1.1%. Relative to history and today what you can earn on cash in a high-yield savings account is low. In 2018 and 2016, the average return of the S&P 500 was 2.09%. In 2008, the average yield had declined by 3%.
Low yields in the S&P 500 are partly a reason for high stock prices – but knowing this doesn’t help you build a solid income portfolio. Luckily, you still have options. High-yield dividend ETFs use several strategies to produce distributions of 3% or more. Presented below are six interesting and popular funds.
iShares S&P 500 BuyWrite ETF (IVVW)
IVVW by the numbers:
- NAV: $44.32
- Coverage: S&P 500 and Call Options
- Expense Ratio: 0.25%
- Delivery Rate: 23.10%
- 1 year return: 13.11%
- Net worth: $262 million
IVVW iShares holds shares of the Core S&P ETF and sells call options on those holdings to generate income. Call options obligate the fund to sell shares at a certain price for a certain period of time. If the asset appreciates above that agreed-upon price, known as the strike price, the fund records a loss, which offsets some of the capital gains.
If share prices remain the same or decline, the fund simply keeps the income earned from selling the call options.
As is known, covered calls perform best in flat, tough or moderately declining markets. In strong markets, the fund will still generate income but will have less leverage. The strategy can be adjusted to suit market conditions, giving up more or less upside in exchange for higher or lower returns.
Invesco QQQ Income Advantage ETF (QQA)
QQA by the numbers:
- NAV: $53.84
- Coverage: Nasdaq 100 and Call Options
- Expense ratio: 0.29%
- Delivery Rate: 9.95%
- 1 year return: 20.92%
- Net worth: $650 million
QQA The Nasdaq-100 fund invests in QQQ and sells call options to generate income and reduce downside risk. The fund consists of the 100 largest non-financial companies listed on the Nasdaq exchange. This group of equities has historically been volatile and high growth – it has increased over the past year 46%.
Combining Nasdaq-100 exposure with a strategic call option strategy adds the elements of growth, earnings, and marginal downside risk reduction. Call options are designed to provide consistent monthly income and minimize drawdown, which can mitigate losses in a bear market. Like IVVW, call writing activity reduces the upside potential.
Invesco S&P 500 Equal Weight Income Profit (RSPA)
RSPA by the numbers:
- NAV: $51.62
- Coverage: S&P 500 (equal weight) plus call options
- Expense ratio: 0.29%
- Delivery Rate: 9.39%
- 1 year return: 12.01%
- Net worth: $732 million
RSPA’s The strategy is like QQA, but the underlying asset is an equal-weight S&P 500 fund. Equal-weight funds hold all index equities in equal proportions rather than weighting them based on market capitalization. Equal weighting eliminates the risk of concentration in the fund and allows smaller companies to participate equally in the fund’s performance.
Fidelity International High Dividend ETF (FIDI)
FIDI by the numbers:
- NAV: $28.02
- Coverage: Large- and mid-cap international stocks that pay dividends
- Expense ratio: 0.18%
- Delivery Rate: 4.12%
- 1 year return: 34.05%
- Net worth: $297 million
FIDI IVVW is a more straightforward strategy than QQA and RSPA. The fund does not sell call options – RSPA achieves high yields by investing in international value stocks. The top sectors represented are financials, energy, consumer discretionary and consumer staples. Norwegian energy company Equinor ASA is the top holding, with a weighting of 4.1%. The portfolio also includes Nestle, Toyota and Mercedes-Benz.
Vanguard Global Ex-US Real Estate ETF (VNQI)
VNQI by the numbers:
- NAV: $47.09
- Coverage: Non-US real estate
- Expense ratio: 0.12%
- Delivery Rate: 4.60%
- 1 year return: 15.08%
- Net worth: $3.7 billion
VNQI Invests in international companies that own, manage, develop and lease real estate. The fund tracks the S&P Global ex-US Property Index. The top countries represented are Japan, Australia, Hong Kong and the United Kingdom.
VNQI pays dividends annually, which may be a drawback. Many US real estate funds pay monthly dividends.
Invesco S&P Emerging Markets Low Volatility ETF (EELV)
EELV by the numbers:
- NAV: $29.07
- Coverage: Emerging Markets
- Expense ratio: 0.29%
- Delivery Rate: 3.50%
- 1 year return: 20.10%
- Net worth: $445 million
EELV tracks the S&P BMI Emerging Markets Low Volatility Index, which consists of the 200 least volatile stocks of the S&P Emerging Plus LargeMidCap Index.
Emerging market stocks may have high growth potential but they are also known for being unpredictable. The fund seeks to take advantage of profit opportunities while minimizing volatility risk.
Financial companies account for 38.3% of the portfolio, followed by consumer companies at 12.9%. The top three countries represented are China, Malaysia and Taiwan.
Risks of High-Yield Dividend ETFs
High yield dividend ETFs have significant risk of income volatility. Cash payments can fluctuate wildly, which can be problematic if you rely on them to pay bills.
Opportunity cost is another concern. Depending on fund strategy and market conditions, income ETFs may underperform on a total return basis. If you are withdrawing and want to minimize liquidation this may be a reasonable compromise. But who can’t do that if you are a long term investor need In the case of income, prioritizing distribution yield over total return is counterproductive.
ground level
Unconventional dividend funds can offer generous yields to finance your lifestyle, but there are trade-offs. Make sure two things before investing. You should know exactly what the trade-offs are and confirm that they do not conflict with your investment priorities. Once you’re comfortable with those two points, you’re ready to get that income machine going.