With interest rates so low, investors have been bidding up the prices of dividend-paying stocks as they try to secure dividend income. As a result, dividends on stocks are near historic lows. For instance, the dividend on the S&P 500 is just 1.8 percent in the aggregate, meaning that you would need to hold over $550,000 worth of stock just to generate $10,000 worth of income. This is bad news if you are retired or near retirement and hope to someday pay for your living expenses using dividend income.
Fortunately, there are plenty of alternatives for these investors. There are numerous ETFs that either have a dividend focus, or that focus on sectors or countries that pay relatively high dividends. Such ETFs enable you to get a diversified source of income. While there are dozens, if not over 100 to choose from, I have selected three that are worth considering now.
1. The SPDR Utilities ETF (NYSEARCA:XLU)
The SPDR Utilities ETF has been leading the market this year. While the Dow is down slightly the utilities are up over 9 percent, and this figure is over 10 percent if you count dividend payments. Investors are drawn to it because utility stocks are very defensive. They generate recurring revenues and stable profits, and they typically pay a high percentage of these profits out to shareholders in the form of dividends. Right now, the XLU pays a 3.6 percent dividend, which is twice as high as the rest of the market.
Utility stocks have corrected nearly 10 percent and now that the overall stock market is weakening, once again utility stocks are rebounding. While we can see some more consolidation, it appears that the correction is over, and I think that income seekers should consider buying the XLU on any weakness.
2. The Oppenheimer SteelPath MLP Funds Trust ETF (NYSEARCA:AMLP)
The SteepPath MLP ETF is a fund that focuses on master limited partnerships, or “MLPs.” These are companies that take advantage of a tax structure that allows them to pay no taxes if they pay the bulk of their profits out to shareholders. The shareholders then treat this income as ordinary income as opposed to capital gains income. It is a structure that benefits companies that have very stable businesses with recurring revenues such as pipeline companies. They aren’t going to expand very much, but they will provide stable income.
The SteelPath MLP ETF pays a 6.2 percent dividend, which dwarfs the payout of the S&P 500. Furthermore, while it is only up 2 percent for the year, this is better than the Dow Jones Industrial Average, and the figure rises to about 6 percent when we include dividend payments. The fund recently suffered a steep correction, but it has found support at around the $18/share level where it is a compelling “buy.”
3. The Global X Super Dividend ETF (NYSEARCA:SDIV)
The Super Dividend ETF is a fund that focuses on global stocks that pay high dividends. It goes through sectors such as utilities and MLPs, but also real estate investment trusts, telecom stocks, and other companies from around the world that pay high dividends. As a result, it pays a 5.9 percent divided. As an added bonus, it makes a monthly pay-out, which is great for investors looking for dividend income as most people have expenses that reoccur on a monthly basis (utilities, insurance, rent/mortgage, etc.) The Super Dividend ETF has outperformed the stock market by a wide margin with the shares up 7 percent while the Dow is flat. Furthermore, the gains exceed 10 percent if you count dividends.
Of the funds listed here, this is the best one-stop shop for dividend stocks because it is diversified by sector and by region. Like other funds, it has corrected recently, but it will see buying as income investors will come in whenever the dividend becomes attractive. While it may have more downside, the time to start looking for an entry point is now.
Disclosure: Ben Kramer-Miller has no position in the funds mentioned in this article.