My favorite monthly dividend ETFs for cash flow and safety
There’s only one thing better than finding that perfect dividend stock with a high yield, even better is when it takes the risk out of your portfolio and puts that cash in your pocket EVERY SINGLE MONTH!
In this video, I’ll show you why every investor needs monthly dividend funds in their portfolio and how to find them. Then I’ll reveal the seven best monthly dividend ETFs for high yield and returns.
Why Every Investor Needs Monthly Dividend Funds
Nation, we talked about monthly dividend stocks last week and the video was immediately one of the most popular ever. I mean, who doesn’t like getting paid every single month for holding a stock and we looked at the best out there with yields of eight- and ten-percent.
But one of the biggest problems with monthly stocks, the issue we talked about in the video, is that risk in having all your money in just a few business types. Since most monthly dividend stocks are either REITs or BDCs, just investing in these sets your portfolio up for a nasty surprise when the economy comes down on the group.
That’s why I had to follow the video up with this one and an idea that’s going to give you the chance to keep collecting that monthly dividend payment but also lower the risk in your investments. Keep the cash flow AND know that those dividends will be there when you need them!
In this video, I’ll show you how to add monthly dividend funds to your portfolio and how to find the best monthly payers out there. Then I’m going to reveal seven monthly dividend ETFs I have in my portfolio.
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Dividend Funds for Passive Income
When you invest in the stock market, there are many ways to do so. One of these ways is through investing in a dividend fund. A dividend fund will provide dividends from its investments on a quarterly basis. This means that every three months, you get a small paycheck from your investments. This keeps the passive income flowing and may allow for some great benefits at tax time.
However, before we get into the different types of dividend funds and how they work, let us talk about dividends themselves briefly first.
What are dividends?
When companies make profits from their business activities (the sale of goods or services), fear investors who provide them with capital to run the business. In return, the companies share a portion of their profits as dividends.
Think about it as a thank you from the company for investing in them and allowing them to make more money. The reasoning behind this is that if an investor sees a company's stock price increase over time, they will buy into that company's shares because they realize that company is doing well and making more money.
Now that we know about dividends, let us dive right into how you too can become part of this passive income revolution by putting your money in dividend funds.
What are the benefits of investing in dividend funds?
Besides the fact that you will receive a steady stream of passive income from them, why should you invest in dividend funds? Dividend funds have historically outperformed the stock market as a whole and they tend to be more stable and less volatile than the overall market. This means that if we go through a major recession or depression, your dividends may not grow as much as your investments do but they won't fall to zero either.
Most importantly, this form of investment helps build wealth. When we say wealth, we don't mean day trading where you try to make as much money as quickly as possible although it can be done with some forms of trading. We mean building up an asset that keeps giving you money. It is true that these are not annual dividends, but they are still money being given to you every quarter without you lifting a finger.
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How to Get Monthly Dividends from Regular Stocks
One of the best things about these monthly dividend funds is they give you the chance to diversify your portfolio into other assets and stocks. Even most dividend stocks don’t pay on a monthly basis so if when you’re looking for that constant cash flow, you’re really limited to those few business types.
Not only does it make for an extremely risky portfolio but there are a lot of great investments out there you don’t benefit from.
But with these dividend funds, they invest in different assets like preferred shares and stocks, and even if those don’t pay monthly, the fund take that cash flow and pay it out regularly to investors.
How to Find the Best Dividend Funds
So we’re going to look at seven great dividend ETFs but I want to do more than just tell you which funds to buy. Those of you in the nation know this channel isn’t about just throwing a stock list at you. I want to give you the tools to be a better investor, know how to pick these investments yourself.
And for funds, it starts with the gaps in your portfolio. Where are the gaps in the stocks or assets you already own. For example, if you own only stocks then maybe you want to look at some bond funds or real estate ETFs to give you exposure to those assets. If you get more growth from your stocks but the dividend yield is a little low, maybe you look for funds with a higher yield to give you that cash flow.
So after you’ve got an idea of what you need in your portfolio, I want you to look at two factors when investing in dividend funds. Most dividend investors go straight to that dividend yield on the fund but I want you to also look at a chart of the stock price and build that into your decision. In that last video, we looked at another one of those problems with monthly payers, a falling stock price. It does no good to collect a 12% dividend if the stock price falls so much that it wipes out your return when you sell.
You also want to look at the expense ratio for the fund. That’s the annual percentage fee charged on fund assets. The fund deducts this from the assets so you don’t see it come out of your account but it still lowers the fund value so has the same effect. The best ETFs, like those from Vanguard and Fidelity, are going to have expense ratios under 0.25% which is just $2.50 for every thousand invested.
A lot of these monthly dividend funds are actively managed and the fund might be using some alternative assets to produce that higher yield, so most here are going to charge higher expense ratios but I wouldn’t pay more than a percent or so for any fund.
This is an important one, especially for the closed-end funds you’ll find that promise dividend yields of like twelve- and fifteen-percent. Against those huge yields, most investors don’t even think to question a 2% expense ratio but then wonder why their portfolio never really goes anywhere. It’s because the only ones getting rich in these funds is the manager collecting that high expense ratio.
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My Favorite Dividend Funds to Buy Now
That said, let’s look at my seven favorite monthly dividend funds, all low-cost ETFs I own and that pay every single month.
I’m starting off with a couple of dividend stock funds and the Global X Super Dividend ETF, ticker SDIV.
The fund holds 100 of the highest dividend paying stocks globally and produces an astounding 12% annual yield. The expense ratio is 0.6% which is higher than most but there’s still a lot to like about this one.
The monthly dividend has come down a little as companies cut or postpone their payments but it’s a well-diversified fund across different industries and internationally. I especially like the exposure to stocks in other countries which is something most investors lack.
The stocks in the fund sport a low 10.3 price-to-earnings ratio, a factor of so many being shares of cheaper international companies. It’s less than half the PE ratio on U.S. stocks so this is a good value play as well as for that dividend yield.
The Invesco S&P 500 High Dividend, Low Volatility ETF, ticker SPHD is a favorite among investors and pays a 5.6% yield.
This is a great dividend stock ETF because it combines the search for those high yields with a lower risk profile in those with lower volatility. The fund invests in 50 stocks of U.S. companies with high dividend yields that have also historically been safer than others. It’s a little more concentrated in a few sectors including real estate, utilities, financials and staples but those just tend to be less volatile than the economically sensitive ones.
Dividends have held up surprisingly well on this one, probably due to the fact that companies are less sensitive to the economy. The dividend payment has increased more than 50% over the last five years from $0.094 to $0.15 per share each month.
The expense ratio is lower on this one, just 0.30% and there’s still some upside price potential on the shares besides that dividend.
The iShares Morningstar Multi-Asset Income Fund, ticker IYLD, is a really interesting opportunity and not just for its 6% dividend yield.
Instead of investing directly in stocks or bonds, this fund is a fund-of-funds. It holds 10 income funds across the asset classes. So you see here, it’s got high-yield bonds, international stocks. It invests in emerging market debt and U.S. Treasury bonds as well as real estate and preferred shares.
The fund has a target of 60% in bonds, 20% in stocks and 20% in alternative income investments. It also holds about 45% of the portfolio in international assets, so strong diversification here.
That large weighting in bonds gives it a high level of safety though it still holds enough in other assets and sectors for a good total return.
The drawback here is because it is a fund-of-funds, the expense ratio is higher at 0.6% annually. You’re essentially paying the expense ratios of the funds in the portfolio, plus the management to run this fund…so if you wanted a cheaper way to do this, you could just invest in the original funds in the same weightings and cut maybe two-tenths of a percent off your expenses.
Notice the dividend yields here aren’t like the highest paying dividend stocks we saw in the prior video. In fact, the next fund I’ll show you pays a yield of just 2.9%…so you’re thinking, why would we ever invest in these when we can get those yields of eight- and 10% on the stocks?
What I like about these funds is they give you that exposure to other assets like preferred shares, bonds and low volatility stocks. They give you that opportunity to still collect a monthly dividend paycheck but not be stuck in just a few investments like REITs and BDCs.
The best strategy here is going to be using a combination of the two. Getting the higher yield from the dividend stocks and balancing it out with a few of these monthly dividend funds, which even on lower risk, they still pay solid dividend yields.
The next fund, the SPDR Bloomberg Barclays Convertible Securities ETF, ticker CWB, has the lowest dividend yield at just 2.9% but also one of the best for total return potential. Look at a chart of the shares over the last year, a 20% return that’s more than double the 9.6% return on stocks in the S&P 500.
The trick is, the fund invests in corporate bonds with an average coupon of 2.5% – that’s where it gets the dividend return, but these bonds are also convertible into shares of stock if the stock price increases. That means investors get all the safety and cash flow of bonds but the upside potential in stocks.
The fund holds 243 bonds across mostly industrial, utility and financial sectors with biggest holdings including Tesla, Wells Fargo and Carnival.
The dividend payment has come down on this one as interest rates decrease and bonds yield less but that total return still makes it a good addition and the expense ratio of 0.4% isn’t the worst we’ve seen.
The iShares Preferred and Income Securities ETF, ticker PFF, is a similar theme and pays a higher yield of 5.7%
Preferred shares are another mix between bonds and stocks. They receive a fixed payment that must be paid before shareholders’ dividends, so they tend to be less volatile compared to stocks, but they also include some ownership appreciation like equities.
It’s a part of the market most investors neglect so it’s nice seeing a fund that gives you easy, one-stop access to it.
The PFF holds 512 preferred securities with an average price-to-earnings ratio of just 9.5-times, which again is about half the market average. The fund price also tends to be about half as volatile as the stock market, so definitely that idea of safety and cash flow.
It’s pretty heavily weighted to the financials sector, with about 54% in banks, diversified financials and insurance because that’s the sector that issues these types of preferred shares the most.
The expense ratio of 0.46% is a little high but the dividend payment here is one of the most stable.
I also want to add a couple bond funds here and our first is the SPDR Barclays High Yield Bond ETF, ticker JNK.
The name here is a little misleading. Bonds rated below BBB are called non-investment grade or junk bonds. They are higher risk than investment-grade bonds but the default rate on these is still just 2.2% – so still very much safer than stocks and a great dividend yield of 5.8% on this fund.
The fund holds over a thousand bonds and is well diversified across sectors so even though these are lower-rated bonds, you’ve got the safety of being spread across the economy.
Dividends have been fairly consistent even through the last few months and the expense ratio of 0.4% is relatively low.
For bond funds, I also like the Vanguard Long-Term Index ETF, ticker BLV, and even though this one only pays a 3% dividend, this is about as safe as you get.
More than 40% of the 2,500-plus bonds in this fund are U.S. Treasury and the rest is all investment-grade rated which has a default rate of less than one-percent.
Surprisingly, for an ultra-safe bond fund, this one has still produced a 7.8% total return annually over the last ten years and the beauty of this one is its 0.05% expense ratio – that’s fees of just $0.50 for every thousand dollars invested so basically nothing.
If you’ve got a lot of high-risk stocks in your portfolio, the BLV is a great fund to smooth out your portfolio risk while still making sure it produces that monthly dividend return.
These monthly dividend funds not only give you a constant cash flow but also access to some assets you won't otherwise get with monthly dividend stocks. These are my favorite dividend ETFs for safety and monthly payments.
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