3 Monthly Dividend ETFs That Can Compound Into an Income Avalanche

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3 Monthly Dividend ETFs That Can Compound Into an Income Avalanche.

investing ideas :: 12hrs ago :: source - 24/7 wallstreet

By Omor Ibne Ehsan

Quick Read

Covered call ETFs like JEPI offer limited compounding due to capped upside and slower recovery during downturns.
PEY delivers 4.54% monthly yield with just 2.79% tech exposure for diversification.
CEFS lists 7.74% yield but a 4.29% expense ratio reduces the real return to approximately 3.5%.
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Dividend investing isn't just a defensive play or a retiree's game. It's a strategy that works exceptionally well over the long run, and stocks like Invesco High Yield Equity Dividend Achievers ETF (NASDAQ:PEY), Invesco S&P 500 High Dividend Low Volatility ETF (NYSEARCA:SPHD), and Saba Closed-End Funds ETF (BATS:CEFS) can compound your money and put you ahead of the market over time.

Quarterly dividends are fine, but monthly payouts let you reinvest faster and accelerate compounding in a meaningful way. If you're a retiree, these monthly dividend ETFs also get you a good income, though these ETFs perform the best when you buy, hold, and reinvest.

The current environment is great since most high-yield monthly dividend stocks are underappreciated by the broader market. Better yet, these ETFs themselves are not getting as much attention as they should. Investors are mostly focusing on the immediate-term winners like call options ETFs that perform well during a market rally but flop during a downturn. Thus, the following three monthly dividend ETFs are solid picks for compounding.

Invesco High Yield Equity Dividend Achievers ETF (PEY)

PEY kills two birds with one stone. This is what you should go for if you want both a handsome yield and sector diversification. I believe this is the perfect ETF if you want to move your money away from covered call funds before a possible downturn. ETFs like the JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI) are not long-term compounding vehicles and are essentially converting the tech rally to a dividend yield.

Once that momentum is lost, you'll bear the brunt of the downside, and the capped upside will make a recovery much harder. If you are using cash from JEPI to fund your lifestyle, you may be better off sticking with it, but if you are not using the yield, I'd quickly move that money into something like PEY.

That's because this is an ETF that can genuinely compound your investments over the long run.

Not only that, the tech exposure is much lower at just 2.79% for the whole fund. It's almost purpose-built for diversification since most investors are knee-deep in tech. If your growth portfolio consists of tech ETFs, and then your dividend portfolio is again tech through covered call ETFs, you're in a dangerous position.

PEY puts you out of that danger while giving you a 4.54% monthly dividend yield. The expense ratio is 0.54%, or $54 per $10,000.

Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)

SPHD does exactly what the name says. It invests in stocks with high dividends and low volatility. It tracks the S&P 500 Low Volatility High Dividend Index, and it invests at least 90 percent of its total assets in the common stocks that make up that index.

The draw is that you get a more "smoother" exposure to the S&P 500 stocks and higher-than-normal yields. It has a 3.82% dividend yield and a monthly payout frequency, with an expense ratio of just 0.30%.

SPHD is up 8.65% year-to-date already, and that's before you factor in the dividends. Investors are moving into high dividend stocks after taking profits on their growth investments. High dividend stocks are set to keep gaining this year if interest rates go down as expected. I wouldn't be surprised if this ETF continues to gain significantly more than the broader market on top of the generous yields.

Saba Closed-End Funds ETF (CEFS)

The Saba Closed-End Funds ETF gives you exposure to overlooked closed-end funds (CEFs). It gets you capital appreciation plus a high monthly yield.

The issuer hunts for CEFs that are trading at meaningful discounts to their net asset value, then buys and sells as those discounts widen to lock in gains from the spread. On top of that, the strategy layers in hedges, mostly through derivatives in the underlying holdings, to blunt the portfolio's sensitivity to rising interest rates. This keeps the focus on harvesting income while trying to avoid the big NAV drops that can hit rate-sensitive CEFs when yields spike.

It is up 6.1% over the past year and gets you a monthly dividend yield of 7.74%. And yes, that's indeed too good to be true. The real "net" yield is somewhere close to 3.5% since the expense ratio is 4.29%. Even then, this is a really good pick if you want monthly income plus upside.

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