The average stock in the S&P 500 Index yields a measly 2.04% right now. While thatâ€™s better than 10-year Treasury bonds at 1.63% â€“ and comes with the potential for capital appreciation, which bonds canâ€™t deliver â€“ itâ€™s still nothing to get excited about.
As I warned on [Saturday], though, the appropriate response isnâ€™t to blindly chase the highest-yielding stocks in the S&P 500. Namely, Windstream Corp. (Nasdaq: WIN), Pitney Bowes (NYSE: PBI) and R.R. Donnelley & Sons (Nasdaq: RRD).
Remember, all it takes is one blowup to erase years of hard fought gains in a retirement portfolio.
Does that mean we should just resign ourselves to earning average yields, though?
Turns out, we can actually invest in all three of the S&P 500â€²s highest-yielding stocks â€“ along with 97 other high yielders from around the world â€“ in a single investment.
In the process, we can earn almost quadruple the yield of the S&P 500. And get paid monthly, to boot.
Iâ€™m pretty sure I have your attention. So let me show you howâ€¦
Iâ€™ll Take Fries and a Dr. Pepper With That Dividend
A little over a year ago, Global X Funds launched the SuperDividend ETF (NYSE: SDIV). Itâ€™s already attracted over $100 million in assets under management, which is enough to officially put it on Wall Streetâ€™s radar. The recent reduction in expenses to just 0.58% promises to attract even more investors.
The fund invests in 100 of the highest-yielding stocks in the world. However, yield alone isnâ€™t the only fundamental considered for inclusion.
First off, the fund excludes companies with limited liquidity and market capitalizations of less than $500 million. It then eliminates any companies that are likely to cut their dividends. And finally, it factors in foreign tax withholdings to get a true apples-to-apples comparison when considering various companies for inclusion.
The end result is a fund that offers notable benefits, including insulation against three specific risks.
By investing in 100 companies, weâ€™re not exposed to a single company torpedoing our portfolio â€“ and our dividend income â€“ if management announces a dividend cut.
For instance, letâ€™s assume the fundâ€™s biggest holding announces a dividend cut and, in turn, shares plummet 25%. If we owned the stock individually, weâ€™d be nursing a fat loss. Since the stock only accounts for 1.5% of the fundâ€™s total portfolio, though, the sudden price drop would dent the fundâ€™s price by less than 1%. Big difference, huh?
And since weâ€™re investing across more than 15 different industries and just as many countries, we also donâ€™t have to worry about getting sabotaged by sector-specific downturns or regional overexposure.
Itâ€™s worth noting, too, that the fund invests roughly 65% of its assets outside the United States. Not only does this provide us with a hedge against a declining dollar, it also allows us to access dividend opportunities we otherwise might not consider because of unfamiliarity with international markets or the costs associated with buying on foreign exchanges.
Companies like Asia-based real estate investment trust, Mapletree Logistics Corp., which yields 6.1%. Or Australia-based G.U.D. Holdings Limited, which makes various consumer and industrial products and yields 10.85%.
Better still, weâ€™re not overpaying for the fundâ€™s current yield of 7.7%. The average stock in the fund is cheap, trading at a price-to-earnings (P/E) ratio of 11.78, compared to 14.85 for the S&P 500 Index. That works out to a 25.21% discount.
On a price-to-book (P/B) basis, the average company in the fund trades at a 42.38% discount to the S&P 500.
As I mentioned before, the fund is a rarity in that it pays monthly dividends. Keep in mind, though, the income is choppy. It fluctuates month-to-month based on the dividend payment schedules of the underlying investments.
That being said, now looks like a particularly attractive entry point. Why? Because based on the historical payouts, the biggest dividends come in October ($0.277 per share) and at the end of December ($0.275).
Assuming the same pattern holds true this year â€“ which it should since many international companies pay dividends once per year â€“ we can still position our portfolios to receive these hefty payments.
However, before you do, let me make one thing perfectly clear. The fund shouldnâ€™t be treated like an old-school money market fund. In other words, donâ€™t park all your cash or income-seeking capital in it. This isnâ€™t a risk-free investment. Instead, the ETF is best suited for small investments to help increase the overall yield of a portfolio.
Source: Dividends and Income Daily