Monthly dividend exchange-traded funds with extremely high yields (sometimes over 15%) have hit the market. However, it’s worth looking into ETFs like Alerian MLP ETF (NYSEARCA:AMLP), Invesco KBW Premium Yield Equity REIT ETF (NASDAQ:KBWY), and iShares Emerging Markets Dividend ETF (NYSEARCA:DVYE) if you want high yield without dealing with options.
On the surface, options ETFs like JPMorgan Nasdaq Equity Premium Income (NASDAQ:JEPQ) look like the best bet ever. You get a double-digit yield, and you get to partake in the upside. The latter makes them particularly attractive as traditional dividend ETFs like Schwab US Dividend Equity ETF (NYSEARCA:SCHD) have performed hideously since 2022.
That’s not to say that there aren’t better traditional dividend ETFs, but even their shareholders feel like they’re missing out once they see JEPQ investors cashing in triple the payouts while growing faster.
Unfortunately, there’s one caveat here. The mania of options ETFs is unlikely to last too long. These ETFs do give partial upside exposure, but the moment the market stops rallying, you’re in for a reality check. For example, ETFs writing covered calls for income are sacrificing exponential gains for linear income. It can get quite ugly when the market goes down, as you will absorb nearly all of the underlying index’s losses.
Worse, if something like a short-selling ban kicks in, like it did in 2008, it entails disastrous consequences for these ETFs. It’s unlikely, but that’s another layer of risk to keep in mind.
Taken together, I would diversify into some traditional high-yield dividend ETFs.
Alerian MLP ETF (AMLP)
The Alerian MLP ETF gives you exposure to energy infrastructure Master Limited Partnerships (MLPs) in the U.S. It tracks the Alerian MLP Infrastructure Index (AMZI), which is a capped, float-adjusted, capitalization-weighted index of energy infrastructure companies.
Energy infrastructure companies may not look like the best bet at first glance due to energy prices being volatile. And when downturns hit, oil and gas prices can be among the worst hit. There’s no need to worry, though, as AMLP’s holdings mostly consist of energy transportation companies, with its top holding being a midstream business.
These businesses derive earnings through fee-based, long-term contracts. Volume would have to be meaningfully low for a long period of time for these midstream companies to see setbacks.
The ETF has been gaining comfortably in the past few years. It pays a dependable dividend yield of 8.22%. The expense ratio is moderately high at 0.85% or $85 per $10,000, but what you net is still well above 7%.
Invesco KBW Premium Yield Equity REIT ETF (KBWY)
The Invesco KBW Premium Yield Equity REIT ETF tracks the KBW Nasdaq Premium Yield Equity REIT Index. It focuses exclusively on small- and mid-capitalization equity REITs that offer competitive dividend yields.
REITs sound scary, especially to those who have a memory of 2008, as they may instinctively associate real estate with danger. However, the industry has learned a lot since then. Real estate has proved to be far more stable, with more room to grow.
REITs have survived through the interest rate increases in 2022 and 2023. Now that interest rates are coming down again, the stage may be set for them to thrive. The government is even considering 50-year mortgages.
KBWY has settled lower near 2020 lows, but the downside risk remains low compared to the upside potential today. Plus, you get a 9.77% annual yield that is paid monthly. The expense ratio is 0.35%, or $35 per $10,000.
iShares Emerging Markets Dividend ETF (DVYE)
The iShares Emerging Markets Dividend ETF gives you exposure to 100 dividend-paying stocks from emerging markets. It is one of the only ETFs that pays a high yield and does so without using options or leverage.
Emerging markets have not done well historically, but they’ve been bouncing back. It also helps that the U.S. dollar’s value is sliding, and foreign companies are thus valued more in your portfolio.
If you want to hedge against tariffs and a sliding dollar while being paid for it, this is a good ETF to buy.
DVYE has a 9.12% dividend yield and an expense ratio of 0.50%, or $50 per $10,000 invested.