3 ETFs Ready for the High-Yield Dividend Stress Test

Dow Jones
Sep 09

So you want income from your portfolio. Long-term Treasuries make perfect sense-the 10-year yield is hovering around 4.8%, after all.

Wait just a minute. This doesn't have to be an either-or. You can own stocks with healthy dividends, too.

They're bond proxies. They have juicy yields, just like bonds.

But these days it's a pressure cooker for the market because of all the economic and political twists and turns-inflation, jobs, interest rates, Iran. Just to name a few. Still, the strategy of buying dividend stocks holds up.

Right now, there are a handful of sectors that have promising yields. Ed Yardeni, of Yardeni Research, likes utilities. Tom Essaye, of Sevens Report, favors healthcare, energy, and consumer staples. And Susan Dziubinski and Brendan McCann, of Morningstar, are partial to Big Tech and financials.

They are each recommending a high-yield dividend ETF based on their sectors.

Yardeni, both an economist and an investment strategist, is so high on utilities that he rates the sector Overweight. The way to play is the State Street Utilities Select Sector SPDR ETF with a 2.8% yield.

Utilities have lagged behind the market this year. And the ETF is up just 2%, compared with the S&P 500's 12%. But Yardeni thinks the weakness is unfounded, given that margins have nearly doubled over the past decade and that the stocks are still trading at a discount to the broader market.

"Profitability has never been better," Yardeni wrote in a report, adding that strong earnings growth for independent power producers such as NextEra Energy are a big plus for the sector.

NextEra is the ETF's largest holding and pays a dividend that yields nearly 3%.

Essaye's recommendation is the iShares Core High Dividend ETF, which has significant exposure to healthcare, big energy producers, and consumer staples-and yields 2.8%. Top holdings include AbbVie, Pfizer, ExxonMobil, Chevron, Procter & Gamble and Coca-Cola.

The fund has fallen about 2.5% since mid-August on worries about a Fed rate hike after hawkish comments from the central bank's new chairman, Kevin Warsh, at the Jackson Hole summit. Now, Fed funds futures are pricing in more than 60% odds of a hike at the central bank's next meeting on Sept. 16.

But Essaye, who wears many hats including researcher and analyst, said traders shouldn't overreact.

"Investors should likely view recent losses as temporary and as opportunities to buy high-dividend payers," he wrote.

For Dziubinski and McCann, buying dividend stocks doesn't have to mean you're giving up on growth. They point to the Fidelity High Dividend ETF, which yields 2.7%. It tracks Fidelity's own high dividend index.

The fund, wrote the investment specialists, "rides the line between income and price appreciation." In other words, the ETF aims to provide both a robust dividend yield and long-term dividend growth.

Tech giants Nvidia, Apple, Microsoft, Dell Technologies, and Broadcom are top holdings in ETF as well as more typical income plays such as financials JPMorgan Chase, Bank of America, and Goldman Sachs and consumer companies Philip Morris, Starbucks, and Home Depot.

The Fidelity fund has roughly kept pace with the broader market this year, rising 11% despite its heavy reliance on some of the underperforming Magnificent Seven stocks.

Dividends are like your favorite sweater, a cup of cocoa, a hot bath. They comfort you. You reach for them when you're tired or stressed.

So for these trying times-maybe more volatility and climbing bond yields-keep these three ETFs close at hand.

 

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