High yield stocks and bonds have seen tremendous inflows of assets over the last four years as investors actively seek both growth and income to boost their portfolio returns. In a world of zero interest rates, being able to achieve a yield of over 5% with capital appreciation potential is a very attractive investment opportunity. But it’s important to exercise caution and carefully research the high yield landscape to determine the best sectors to allocate your hard earned nest egg.
This article focuses on three ETFs that have performed exceptionally well in 2013 and should be on your equity income watch list.
ISHARES S&P U.S. PREFERRED STOCK ETF (PFF)
Preferred stocks have typically been a staple of many income investors’ portfolios as both a stable source of dividends as well as an excellent capital appreciation opportunity. Preferred shares are often described as a type of hybrid investment, part equity and part debt security.
The iShares S&P U.S. Preferred Stock ETF (PFF) has over $11 billion in total assets and charges an annual expense ratio of just 0.48%. This fund holds over 300 securities that are centered primarily in the financial, real estate, insurance, and utility sectors. The current 30-day SEC yield on PFF is 5.62% and looking at the chart below you can see that it has recently hit new year-to-date highs.
I like PFF because it is the largest and most liquid preferred stock ETF on the market today. The fund pays a monthly dividend which is very dependable for investors seeking current income. In addition, it has a very low correlation (beta) to the S&P 500 Index of just 0.21.
ALERIAN MLP ETF (AMLP)
Master Limited Partnerships (MLPs) are publicly traded partnerships engaged in the transportation, storage and processing of minerals and natural resources. These high dividend paying securities provide an excellent source of quarterly income and give your portfolio exposure to the energy transportation sector.
The Alerian MLP ETF (AMLP) has over $6 billion in total assets spread among 25 holdings that are weighted by their market cap. The top three holdings include: Kinder Morgan Energy Partners (KMP), Enterprise Products Partners (EPD), and Magellan Midstream Partners (MMP). The current 30-day SEC yield on AMLP is 5.82% and it trades over 3 million shares a day.
One of the benefits of owning AMLP rather than directly investing in the underlying securities is that you do not receive a K-1 tax statement at the end of the year. In addition, the dividends are qualified which make it a more tax friendly investment vehicle.
As you can see on the chart above, this fund has been rocketing higher since the beginning of the year and also sits near its 52-week highs. I would advise new investors to wait for a pullback before entering this position so that you don’t get burned by a swift correction. In addition, it is always a prudent risk management technique to set a trailing stop loss on the ETFs in your portfolio to guard against downside risk.
ISHARES MORTGAGE REIT CAPPED ETF (REM)
When it comes to really juicing the yield on your portfolio, many aggressive investors are drawn to the double digit income that mortgage REITs provide. The iShares Mortgage REIT Capped ETF (REM) gives you exposure to 30 U.S. residential and commercial mortgage real estate investment trusts. The current 30-day SEC yield on REM is 11.07% and its dividends are paid on a quarterly basis.
I always caution investors to remember that with high yield comes high risk. REM has traditionally seen more volatile and swift price swings which may be difficult to stomach for conservative income seekers. However, those that have owned the fund over the last 12 months have been richly rewarded for their capital investment with the fund gaining 26.80% in total return (through 4/23/13).
The chart above tells the tale quite starkly, with this ETF showing periods of strong demand and volatile sell offs. REM is another fund that aptly warrants a sell discipline to protect your portfolio against the ravages of a downturn in mortgage REITs.
THE FINAL WORD
With inflation ultimately looming on the horizon and the Federal Reserve doing its best to pump up the economy, income investors will have to be savvy in seeking out new high yield opportunities. Each of these equity income funds represents a unique sector of the market that may be an excellent way to boost your portfolio’s dividend yield.
