With today's low interest rate environment, current income has
been hard to come by. Yields on the benchmark 10 year Treasury bond
are currently around an ultra low level of just 1.5%, less than the
rate of inflation here in the United States.
As a result of this, many investors have been forced to look beyond
Treasury bonds for their income needs, pushing investors into junk
bonds, international debt, and a variety of dividend stocks as
well. While any number of individual names could be good choices, a
broad sector approach could be appropriate for some investors who
want to spread risks around a group of companies (read
11 Great Dividend ETFs
).
For these investors, a look at some of the ETFs that offer up
outsized payouts could be warranted, especially the products that
have truly remarkable dividend rates. In fact, a few of the top
yielders in the Exchange-Traded world actually have yields that are
approaching the double digit level, thoroughly crushing not only
the T-Bill yield, but the payout on the S&P 500 as well.
In particular, two products, which are structured as leveraged
Exchange-Traded Notes, could make for interesting picks at this
time. That is because both of these notes offer up a potent
combination of 2x leverage and high yield segments, producing
dividend Exchange-Traded Products that are tough to beat solely
from a payout perspective (see
Three Excellent Dividend ETFs for Safety and
Income
).
However, investors should note that the space is not without risk
by any means. The leverage structure suggests that volatility will
be relatively high, although the monthly rebalancing feature
inherent in these notes implies that they will more closely track
their indexes over extended time periods. Additionally, since both
are ETNs, they do have some credit risk of the underlying
institution, although there is no tracking error in either of the
products (also see
ETFs vs. ETNs: What's The Difference?
).
Despite these risks, the yields on these two ETNs are hard to pass
up, especially considering the lack of high yielding options out in
the market place right now. So, if you are willing to take on a
little risk and volatility for an outsized dividend yield, a closer
look at either of the two ETNs highlighted below could be a great
idea:
ETRACS Monthly Pay 2xLeveraged Long Alerian MLP Infrastructure
Index ETN (
MLPL
)
MLP investing has become extremely popular as of late due to the
sector's high yields and relative stability when compared to the
other corners of the energy world. Not only that but most of the
sector has to pay out the vast majority of its income to
unit-holders, making them favorites among a number of
dividend-focused investors.
In order to play this with an ETN, investors can look to MLPL,
which tracks the Alerian MLP Infrastructure Index with 2x monthly
leverage. This benchmark consists of 25 infrastructure MLPs,
focusing in on firms that obtain the majority of their income from
the transportation and storage of energy commodities (read
Oil Bull Market is no Place for MLP ETF
Investors
).
Top constituents in the underlying index include Kinder Morgan
Energy Partners (
KMP
), Enterprise Products Partners (
EPD
), and ONEOK Partners (
OKS
). Mid cap stocks make up about half of the product, while large
caps account for another 38%, suggesting a tilt towards the bigger
side of the mid cap space.
Where the product really shines, however, is in the yield column.
Thanks to the leverage and the high payouts inherent in the
industry, the product pays out an impressive 10.7% in current
annual leveraged yield terms. However, the total return so far in
2012 has been disappointing as it has lost about 2.9% from a
year-to-date look, although it is up 16% in the past 52 week
period.
Still, despite this truly fantastic performance, the product has
relatively light volume of about 44,000 shares a day, suggesting
modest bid ask spreads. Also, MLPL is somewhat expensive, charging
investors 85 basis points a year in fees as an annual tracking fee.
ETRACS 2xLeveraged Long Wells Fargo Business Development Company
Index ETN (
BDCL
)
Another traditionally high-yielding space can be found in what is
known as the 'Business Development Company' market. Firms in this
corner of the market invest in small businesses that are in the
initial stages of growth, generally taking equity or debt stakes in
these firms.
Much like their MLP counterparts, these firms generally have to pay
out a high percentage of their income to investors on a regular
basis in order to enjoy certain tax privileges. Due to this, they
are often high yielders as well, making them an increasingly
popular, but still overlooked, destination for current income.
In order to access this space in basket form, a look to BDCL could
be a great idea. The note tracks the Wells Fargo Business
Development Company index with 2x monthly resetting leverage,
giving investors exposure to a cap-weighted benchmark that measures
the performance of BDCs listed on U.S. exchanges that qualify as
BDCs under the Investment Company Act of 1940.
In total, the underlying index offers up exposure to roughly 26
companies, with close to one-third of the total going to the top
three companies; American Capital (
ACAS
), Apollo Investment (
AINV
), and Ares Capital (
ARCC
). Additionally, investors should note that almost two-thirds of
the product is in micro caps, while mid and small caps round out
the rest, suggesting volatility could be very high in the BDCL,
especially in times of broad turmoil.
Still despite this risk of volatility and leverage, BDCL has been
an outstanding performer. The product has added more than 24% so
far in 2012, although it is flat over the 52 week look. However,
the yield is truly impressive in this note as it comes in at an
unheard of 18.7% per year (see
BDCL: Yield King of Leveraged ETFs
).
Unfortunately, this outstanding yield hasn't really translated into
a big following as the product sees volume of about 35,000 shares
in a normal day, suggesting relatively wide bid ask spreads.
Additionally, the UBS note charges 85 basis points a year in fees,
much like its MLP cousin.
This low volume, relatively high fees, and periods of high
volatility have undoubtedly kept some investors out of BDCL.
However, for those looking for a real dividend king in today's low
interest rate world, this ETN is hard, if not impossible, to beat.
Want the latest recommendations from Zacks Investment Research?
Today, you can download 7 Best Stocks for the Next 30 Days.
Click to get this free report
Follow
@Eric
Dutram
on Twitter
AMER CAP LTD (ACAS): Free Stock Analysis Report
E-TRC WF BDCI (BDCL): ETF Research Reports
ENTERPRISE PROD (EPD): Free Stock Analysis
Report
KINDER MORG ENG (KMP): Free Stock Analysis
Report
E-TRC UBS 2XLLA (MLPL): ETF Research Reports
To read this article on Zacks.com click here.