CDs (Certificates of Deposit) yield a fixed rate, and many have been leaning towards them due to the higher interest rate environment in recent years. However, it’s worth looking into dividend ETFs like iShares Flexible Income Active ETF (NYSEARCA:BINC), ALPS REIT Dividend Dogs ETF (NYSEARCA:RDOG), and iShares Preferred and Income Securities ETF (NASDAQ:PFF), as it’s not a good idea to hold CDs long-term.
CDs certainly offer more safety and predictable returns, but they lock up money for fixed terms and early withdrawal penalties. Yields are still much lower than some ETFs that give you a higher yield and upside potential. If you weigh that against the most recent inflation headline, your true yield drops closer to 4% if you open a bank CD today.
If you keep your money in CDs year after year, the opportunity cost becomes huge as you miss out on the stock market’s gains. Moreover, you have the freedom to withdraw your money from dividend ETFs at any moment without any penalties.
These higher returns come with higher risks than FDIC-insured CDs, but long-term investors don’t have much to worry about, as good dividend ETFs tend to recover eventually.
iShares Flexible Income Active ETF (BINC)
The iShares Flexible Income Active ETF is an actively managed ETF whose primary goal is to maximize long-term income while providing capital appreciation whenever possible.
It uses a multisector approach that invests across global fixed income markets without being constrained by traditional benchmarks. This lets it capture attractive risk-adjusted yields regardless of market conditions.
BINC dynamically rotates risk across what BlackRock calls “plus sectors” of the fixed income market. In short, you get access to harder-to-reach fixed-income sectors through BlackRock’s Fundamental Fixed Income platform. The dividend you get comes from ~4,000 holdings. The lead manager is Rick Rieder. He is one of BlackRock’s most senior investment professionals and oversees ~$2.7 trillion in assets.
Dividends are paid monthly, and the current dividend yield is 6.14%. The expense ratio is 0.40%, or $40 per $10,000.
ALPS REIT Dividend Dogs ETF (RDOG)
The ALPS REIT Dividend Dogs ETF applies the “Dogs of the Dow Theory” to real estate investment trusts (REITs). It tracks the S-Network REIT Dividend Dogs Index to replicate the performance of this index by investing in high-dividend-yielding REITs across nine equally weighted segments of the real estate market.
It has 47 holdings, and none constitutes over 3% of the ETF. Thus, you get an ETF that holds a very diversified basket of some high-yielding REIT companies. REITs aren’t just typical residential housing companies, and many of them are involved in media, industrials, and even healthcare, so this is an excellent way to capture income from the broader economy.
They have been far more resilient and have survived the high-interest-rate environment in the past three years. Now that the Federal Reserve is cutting interest rates, these REITs have room to grow and recover.
You get a 6.67% yield, with dividends being paid out on a quarterly basis. The expense ratio is 0.35%, or $35 per $10,000.
iShares Preferred and Income Securities ETF (PFF)
The iShares Preferred and Income Securities ETF invests, as the name suggests, in preferred stocks. Preferred stocks are a “hybrid security,” meaning you get features that resemble both stocks and bonds. Investors get priority for fixed dividends and asset claims over common shareholders, commonly forgoing their voting rights.
These preferred shares are great vehicles for income if you want high yields, and they often go under the radar. If and when you do buy them, it is a good idea to do so at a discount. Unlike common stock, preferreds carry a par value (or face value) that they are issued and at which they will be redeemed at maturity.
Preferreds can drop below their par value in high-interest-rate environments as they become less competitive. This is exactly what has happened with PFF, with the ETF losing 18.8% of its value over the past five years.
But as interest rates come down, I expect it to bounce back. It has likely bottomed out and should give you both a generous yield and some healthy upside on the way up in the coming quarters.
PFF yields 6.07% with monthly payouts. The expense ratio is 0.45%, or $45 per $10,000.
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