Monthly Income from Equity ETFs

David Fabian – editor of The Flexible Growth & Income Report – highlights 5 equity ETFs that provide investors with a steady stream of income due to a monthly dividend payment schedule.

Steve Halpern:  Our special guest today is ETF expert, David Fabian, money manager at FMD Capital and editor of The Flexible Growth & Income Report.  How are you doing today, Dave?

David Fabian:  I'm wonderful, Steve.  Thanks so much for having me back.   
Steve Halpern:  First can you tell our listeners about FMD Capital and how you utilize ETFs as the underlying part of your management strategy?  

David Fabian:  Absolutely.  Well, our core business here at FMD Capital Management is we are a fee only registered investment advisor and we do specialize in exchange-traded funds for our client portfolios.  

ETFs make up roughly 70% to 80% of the portfolios that we manage here in house and we really use these tools as core building blocks for both our equity and fixed income allocations for clients.  They really are just fantastic tools for a number of reasons.  They're extremely diversified.  They're very low cost.  They're transparent.  

They're extremely tax efficient as well for investors that implement them in taxable accounts and so that's why we really opted for those over a lot of actively managed mutual funds or individual stocks or something like that because ETFs just make things extremely simple and low cost and easy to understand for our clients.  

Steve Halpern:  Now in addition to your money management operations you've also launched an excellent financial newsletter called The Flexible Growth & Income Report.  Can you just tell our listeners a little about this while we're discussing your strategy?

David Fabian:  Yes, The Flexible Growth and Income Report, we just celebrated our one-year anniversary actually in September.  We're extremely excited about this service.  We've had just a tremendous first year overall and it's really a very balanced portfolio.  

It's a total portfolio solution for do-it-yourself investors that just need a little bit more help with their portfolio.  We do use ETFs primarily with some tactical exposure to closed-end funds as well just to both generate yield.  

As we talked about the growth and income we want to be focusing on the yield side of the portfolio and then we want to also make sure we're getting some nice capital appreciation as well.

We kind of layer in both ETFs and closed-end funds within our strategy using both stocks, bonds, and alternatives like preferred stocks and REITs and things like that, but it just makes a very simple portfolio for investors to follow.  

We tell you exactly when to buy, when to sell and the like and, that way, we try to make things very simple and transparent and it just provides an additional layer of advice that you can implement within your own account.  

Steve Halpern:  Now, you recently had a fascinating research report on how to generate monthly income from equity ETFs.  Before we look at the specific ETFs, can you explain the overall benefits of buying ETFs for monthly income?  

David Fabian:  Certainly.  Most stock ETFs pay quarterly dividends and I think most investors know if you own the SPDR S&P 500 ETF (SPY), every single quarter — in March, in June, in September, in January — you're going to receive those dividends into your account.

But some income investors, if you're in retirement, if you're living on a fixed budget, if you have other needs, you don't necessarily like to see that lumpy up and down income coming every single quarter, if you're using this income for spendable needs in your life -- or for other things that are going on. 

Some investors really like to have sort of that steady every single month; they know exactly how much is coming into my account.

And what I did is I identified five of some of the top funds in this category that actually pay monthly rather than quarterly income, but you're still getting that stock exposure in your portfolio so it's almost paying income like a bond, but you're still obviously owning very large cap or very well-known index of stocks.   

Steve Halpern:  Now, one of these monthly income payers is a well-known fund -- the SPDR Dow Jones Industrial Average ETF (DIA).  What's the story here?

David Fabian:  I'm sure most people know that DIA has been around a long time.  It tracks, of course, the famous Dow Jones Industrial Average, but many people probably don't know it does pay a monthly dividend so instead of getting that quarterly check in the mail — so to speak that you get from SPY.

DIA breaks that out into smaller monthly chunks that they deposit at the end of every single month and of course it tracks the 30 mega cap stocks within the Dow Jones Industrial Average and the Dow is kind of an interesting index because it's price weighted so it's not market cap weighted.  

It's not equal weighted, but the way that they construct the index is based on the prices of the underlying stocks.  

The stocks with the largest prices actually make up the majority of the assets so that's why stocks like Goldman Sachs and 3M are actually the largest holdings within DIA right now, but the fund's got 12 billion under management.  

It pays the yield of about 2.5% annually.  Again, 17 basis points to own so it's just a very low cost diversified way to own a basket of stocks; very large cap, very blue chip well-known companies and still get that monthly income stream.  

Steve Halpern:  Now you also suggest two funds from the PowerShares family that focus on monthly income, but have an added twist to it that they each focus on low volatility stocks and that's the PowerShares S&P 500 Low Volatility Portfolio (SPLV) and the PowerShares S&P 500 High Dividend Low Volatility Portfolio (SPHD).  Could you address these two funds and explain the difference between them?

David Fabian:  Absolutely.  The first one you mentioned the PowerShares S&P 500 Low Volatility portfolio; SPLV is one that I've written about on my blog quite a bit and low volatility stocks have really become prominent over the last several years as we've seen some very whippy action in the stock market.  

A lot of investors have really transitioned their portfolio to some of these low volatility indexes because they tend to have fewer price fluctuations overall than just a large market cap weighted index or just a traditional benchmark.

What SPLV does is it takes the 500 stocks within the S&P 500, it tracks them based on their volatility and it selects the 100 stocks within the S&P 500 with the lowest volatility over the last 12 months and it equal weights them across everything.  

At the end of the day — I know that was a lot — but you get 100 stocks within SPLV with the lowest overall volatility and it does again pay that monthly income stream.  It only has an expense ratio of 25 basis points so it's extremely low cost.  

There are almost $7 billion of assets in the fund and it's paying a yield of about 2.3% so you're getting a very conservative way to access a group of 100 stocks within the S and P 500 that typically have shown fewer price fluctuations than their peers.  

A lot of times these indexes are very good for keeping people invested in the market when they would otherwise get scared when the market's going down 10%/15%/20%.  An index like this is designed to capture stocks that only move down a smaller percentage of that larger overall move and so SPLV is one to consider.  

Now, sort of its sister fund in the PowerShares family is SPHD and that's a low volatility high dividend portfolio and we call this sort of a multi-factor screen because not only are they screening by the same low volatility they're also screening by the highest dividend payers as well.

So you're getting only 50 stocks in this index, but they're the highest dividend paying stocks in the S and P 500 with the lowest volatility overall.  This fund actually pays a much higher yield; closer to about 3.8% and again, income is paid monthly to shareholders.  

Steve Halpern:  Now, finally, let's look at a pair of monthly dividend payers from WisdomTree that are distinguished by their focus on market capitalization.  There's the WisdomTree Large Cap Dividend Fund (DLN) and the WisdomTree Small Cap Dividend Fund (DES).  Could you talk briefly about these two funds?  

David Fabian:  Yes, WisdomTree is a fantastic fund family.  In the last couple of years they've really become known more for some of their currency hedged funds, their international products and the like, but really they started out as a dividend smart beta index company and DLN and DES are two examples of that style of ETF.  

DLN is a little bit more of a broader index.  It tracks 300 large cap stocks within the overarching, total market.  It has a yield of about 2.8%.  Income is deposited monthly into your account and so it's a really nice way for income investors to sort of get that very steady income stream.

And DES is sort of the sister fund as well; kind of similar to how that PowerShares funds work. DES is the small cap equivalent so if you were looking for a large cap fund, you could go with DLN.  If you're looking for a small cap fund you go with DES.

DES owns 650 small-cap stocks and they're all weighted based on their dividend payments so the stocks with the largest dividend yields are given the largest amount of assets within the fund; pays the yield a little over 3% right now.  

Again, income is paid monthly so this could potentially be a very nice core position for an income investor that's looking for a small amount of small cap exposure for their portfolio and it charges an expense ratio of about .038%.

So these are just a few ideas we've been screening and looking at here at our offices that we believe will work very well for people that are looking for monthly income.  

Steve Halpern:  Again, our guest is ETF specialist, David Fabian of FMD Capital.  Thanks for your time today.  It's always a pleasure to talk to you.

David Fabian:  I appreciate it Steve.  Thank you.

By David Fabian, Editor of The Flexible Growth & Income Report