The 10-year U.S. Treasury yield has a pretty decent yield that’s just shy of 4.3% at the time of this writing. That’s not at all a bad yield for an investment that’s free from risk. With the S&P 500 finishing last week at fresh all-time highs just shy of 6,200 despite the ending of trade talks with Canada, valuations are getting a tad overheated again. In a prior piece, I noted that the climbing price-to-earnings (P/E) could limit longer-term upside for the index. And that could make the U.S. Treasuries seem like a worthier bet at this most uncertain juncture.
While there’s no issue with being content with a yield just north of 4%, I do think that younger investors who can and probably should take on more risks with stocks can do a lot better, not just on the yield front, but in terms of total returns. In this piece, we’ll have a look at a few ETFs (Exchange-Traded Funds) that are cheaper than the S&P 500 with yields that are richer than those currently offered by the 10-year U.S. Treasury note.
SPDR Portfolio S&P 500 High Dividend ETF
The SPDR Portfolio S&P 500 High Dividend ETF (NYSEARCA:SPYD | SPYD Price Prediction) is a popular 4.5%-yielding ETF for investors seeking exclusive exposure to the top 80 highest-yielding members of the S&P 500. These dividend stocks with “top 80%” yields also happen to be much cheaper than the broader S&P 500 index, with a price-to-earnings (P/E) ratio of 14.5 times and a price-to-book (P/B) multiple of just 1.69 times.
Indeed, if you’re concerned about the historic frothiness of the S&P 500 and want to get paid more while you wait, the SPYD is a great option for investors who aren’t yet ready to ring the register on stocks for Treasuries. Of course, the SPYD is only slightly less bumpy of a ride than the S&P 500, with a 0.93 beta. With the S&P 500 at new highs and the SPYD still down 11%, perhaps it’s a great time to rotate into the SPYD before the next growth scare has a chance to cause another fear-driven run to higher-yielding defensives.
Though the beta is close to one, I’d argue that the SPYD is less likely to follow in the footsteps of the S&P 500 moving forward, given its hefty weighting in names that are already well below their peaks. With a heavy weighting in real estate and utilities, the SPYD stands out as a well-diversified basket of stocks for investors who are worried about a brewing tech or AI bubble.
Invesco S&P SmallCap High Dividend Low Volatility ETF
The Invesco S&P SmallCap High Dividend Low Volatility ETF (XSHD) is a unique ETF for investors who want higher yields (and value) from the small-cap universe. Indeed, if you’ve already got a diversified portfolio and are heavy on America’s large-caps (like those in the S&P 500), perhaps the XSHD is a great addition at these levels.
As you may know, the smaller-caps are choppier and perhaps a lot riskier than their blue-chip counterparts. But the tough ride is the price paid for a shot at richer rewards. For some small-cap stocks, there’s more upside potential, but for the XSHD, it’s about fatter yields. The XSHD sports a commanding 7.51% yield right now after tanking close to 50% from its 2018 highs. I think there’s great value to be had here, especially as the Fed starts lowering the bar on interest rates over time.
The XSHD invests in the 60 higher-yielder (but less volatile) stocks within the S&P SmallCap 600 Low Volatility High Dividend Index. Think of it as a similar methodology to the SPYD, but for the small-cap universe. With nearly half of the ETF allocated to financials and real estate and less than 1% in information technology, investors should know what they’re signing up for with a bet on the XSHD. Many of the names within the fund are relatively unknown.
With the exception of Papa John’s International (NASDAQ:PZZA), a $1.5 billion firm with a 3.8% yield, I really haven’t heard of most of the stocks within the XSHD. Either way, I find it to be a great one-stop shop for investors seeking more yield than Treasuries and exposure to the often-neglected small caps.
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