3 Low-Cost Equity ETFs With High Dividends
For long-term investors, a good cash payout can be difficult to find these days.
Sure, there are U.S. Treasuries. Fears of more interest rate hikes have put the 10-year Treasury note yield above 4.3%, its highest level since the 2007 financial crisis. A good enough yield for some — but for others, the lack of price appreciation potential is a turnoff. Not to mention Fitch's recent downgrade of government debt, which has made U.S. credit a tad less 'risk-free.'
Are there any growth investments that come with a hefty side of cash distribution?
There are actually quite a few options. Plenty of publicly traded companies offer high dividend yields. However, sifting through hundreds of alternatives can be daunting, especially when some dividends are 1) high because the business is struggling or 2) unsustainable based on future cash flows.
This brings us to exchange-traded funds or ETFs — diversified stock portfolios that are actively or passively managed by professional investment firms. Equity ETFs appeal to investors because they provide access to a broad set of stocks that together are less risky than picking a handful of individual stocks.
Nowadays, there are more high-yielding equity ETFs than ever before. The only problem is most are expensive. Excluding leveraged and inverse ETFs, some 73 funds have yields higher than the current 10-year Treasury yield. More than half of these have an expense ratio, the annual fee subtracted from an investment, of 0.50% or higher. High expense ratios eat away at high dividend yields, making the ETF less attractive.
There are, however, some high-yield ETFs with more moderate fees that let the investor hang on to more of their cash handouts and capital gains. These 3 funds are among the best.
JEPI is an ETF that invests in stocks and stock derivatives, the latter of which derive their value from the price movements of underlying equities. The fund writes (i.e., sells) out-of-the-money S&P 500 call options to generate monthly income distributed to shareholders. The strategy also helps offset portfolio risk, resulting in an attractive, low-volatility, high-income vehicle.
The bulk of the portfolio consists of approximately 125 stocks selected from a fundamental research process that employs a proprietary risk-adjusted stock ranking. JEPI is well diversified at the sector level, with technology and financials each accounting for about 13% of the fund. All positions have weightings below 2%, with Amazon.com, Adobe and Microsoft the current largest holdings. The ETF has a 7.6% dividend yield, making its 0.35% expense ratio easy to accept.
Growth and income investors seeking a low-volatility international equity solution should consider LVHI. The fund boasts a five-star Morningstar rating, which stems from its strong relative performance over the last five years. Its 6.9% annualized return (through 7/31/23) is well ahead of the 6.0% benchmark return and among the best in the foreign large-cap value category.
LVHI invests in non-U.S. companies located in developed markets that share three common traits: 1) low prices, 2) high yields, and 3) low earnings volatility. The index on which it is based screens for profitable companies with the potential to pay high sustainable dividend yields (with the key word being 'sustainable'). On a weighted basis, the fund's 113 holdings have an ultra-low 8x trailing P/E ratio to go along with a 6.1% annual dividend (paid quarterly). At a modest 0.40% cost, LVHI provides exposure to Japan, the U.K., Canada and several other international equity markets.
Last but not least, FNDE is a great way to get emerging markets exposure into a portfolio and, at the same time, earn high cash flows. The ETF focuses on the largest, fundamentally sound companies in developing economies. Through the end of the second quarter, it had a super low 7x P/E ratio, a 4.9% trailing dividend yield and a 0.39% expense ratio.
The passively managed FNDE has drastically outperformed the MSCI Emerging Markets Index on a 1-year, 3-year and 5-year basis, which speaks to its low valuation high yield bend. It currently holds nearly 400 emerging market stocks, with Taiwan Semiconductor, China Construction Bank and Hon Hai Precision the lead horses. Roughly 35% of the fund is invested in China, and financials command the largest sector weight at 28%.
Like all three of these ETFs? A hypothetical 60% JEPI /30% LVHI /10% FNDE allocation would create a portfolio with a 6.9% yield at a 0.37% cost — and plenty of country and sector diversification.