A weird thing happens when investors start seeing signs of a recession or just start convincing themselves that a recession is inevitable and coming soon; interest rates begin to fall, which means bond yields begin to drop. Most investors are told when they start investing that stocks are risky, but they offer better long-term growth, while bonds are safer, but they don’t offer investors as much potential growth.
While these statements may be true during certain situations, they certainly don’t always hold true. Sometimes, stocks may be both less risky and offer higher growth than bonds. I personally believe now be may one of those times.
As things sit now, bonds are offering rather low yields. The three-month treasury is paying 1.78%, the 12-month treasury is paying 1.75%, while the even longer five-year treasury is only offering a yield of 1.56%. The ten-year treasury is at 1.68%, and the 30-year treasury is sitting at 2.13%. These returns are hardly likely to keep up with inflation over those longer periods. Buying an investment that may just keep up with inflation seems somewhat risky to me.
Even the bond ETFs that have performed well year-to-date and pay yields to their investors aren’t currently offering anything much better than what investors can get from Treasuries. The Vanguard Long-Term Corporate Bond ETF (VCLT) which is up 21% year-to-date is offering one of the best yields at 3.5%. But this ETF is rather risky considering if, and when interest rates turn around, this fund will get hit.
On the other hand, certain stocks are currently offering higher yields, while also offering the chance for stock price appreciation, regardless of which way interest rates run. Let’s take a look at a few of my person favorites equity Exchange Traded Funds, which offer both growth and healthy, reliable yields.
The first is your run of the mill S&P 500 ETFs which are up more than 20% year-to-date. Any of the big three S&P 500 ETFs; the Vanguard S&P 500 ETF (VOO), the SPDR S&P 500 ETF (SPY) and the iShares Core S&P 500 ETF (IVV) all offer yields in the 2.0% range or higher. So not only are they paying you more than most of the US Treasury bonds, but they are offering substantially more upside growth than the bonds or bond ETFs.
But, perhaps the yield is all you really care for, and you feel the bonds are a safer bet in terms of yield. Well, you may be correct. However, there are a few companies out there that have a rather strong history when it comes to paying dividends to their shareholders. And not only paying dividends but increasing those dividends each and every year. One ETF, the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) only buys shares of companies that have increased their dividends for a minimum of 25 consecutive years. Yes, 25 years means that these companies have weathered the last few recessions we have seen and not only where able to maintain their dividends but increase them during those recession years.
Another similar ETF is the SPDR S&P Dividend ETF (SDY), which only buys companies that have paid and increased their dividends each of the last 20 years. The biggest difference between the two ETF’s is that NOBL only owns 57 companies while SDY owns 113. SDY pays out 2.46% yield while NOBL pays out a 2% yield.
Both NOBL and SDY own companies that are both extremely stable, based on their dividend growth history, and offer investors stock price appreciation since NOBL is up 19.25% year-to-date while SDY is up 16.38% year-to-date.
Finally, we have something like the SPDR S&P Global Dividend ETF (WDIV), which is simply an ETF that finds high dividends in the global equity space using an S&P index and then focuses on long term dividend stability and or growth. WDIV is up 11.48% year-to-date but offers a yield of more than 4.55%. The fund has 102 positions with a weighted average market cap of $28 billion.
The ETFs I have mentioned above are by no means a full list of high dividends paying equity ETFs. However, they all focus on quality stocks, while offering a yield, which should be the two more important items on your list when looking for yield and growth combinations. Higher yielding equity ETFs that I didn’t mention above may be riskier in terms of price appreciation during both recessions or periods of economic growth.
The benefit of finding good, healthy companies bundled into one ETF is that you should be able to expect a solid rate of return regardless of whether we are heading towards a recession, are in one, or coming out of one. Bond ETFs are too dependent on interest rate movements and require much more attention then you may want to dedicate.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor did not own shares of any asset at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
