Use this screen to find high-yielding ETFs that will weather the crisis.
Financial markets around the globe are fluctuating violently because of greed and fear-- with fear overshadowing occasional glimpses of optimism over the past few months. Amid the unprecedented levels of volatility we are experiencing in the market today, it's no surprise that many investors are clamoring for some sort of stability, or a financial "safety net," if you will. To that end, we decided to screen our ETF database in search of the highest-yielding funds. If we are facing a period during which investors should expect lower returns because of the deleveraging process that our financial system is undergoing and the looming threat of a global slowdown, then sustainable dividend payments could be an excellent way to ensure that we're capturing our fair share of the market's returns.
The first thing we are looking for is the yield itself. When asked about his outlook for expected returns on Berkshire Hathaway's stock portfolio, Warren Buffett promptly replied, "We would be very happy if we earned 10%, pretax." Co-chairman Charlie Munger added, "You can take what Warren said to the bank. We are very happy at making money at a rate in the future that's much less than the past ... and I suggest that you adopt the same attitude." Given that attitude among some of the most successful investors today, we would be happy to lock in nearly half that return straight away through dividends, so we start by screening for ETFs with 12-month yields of 4% or higher.
Security Type = ETF
And 12 Mo Yield > 4
Next, we want to make sure these large payouts keep coming in the future and, we hope, grow over time. The goal is to sidestep those ETFs that, on the surface, appear to offer some very handsome yields but could see dividend payments slashed in lieu of raising or preserving capital in an attempt to survive the ongoing credit crunch. As banks and REITs face the credit crunch, we expect the fat yields on most financial-services stocks to disappear. So, to ensure that our ETFs provide sustainable dividends, we screen out those that have a greater than 15% stake in financials.
And % Financial Services < 15
It also helps to see if the market believes that the dividends paid by the companies inside these ETFs will remain sustainable. Because announced company earnings at this point still only include business results during the strong economy up to the end of September, reported earnings should be near a peak for most companies. If the stock's price/earnings ratio has cratered, the market likely believes the company is distressed or will lose much of its former profitability in the future. Neither scenario bodes well for the future of those companies' dividends. With the S&P 500 trading around a P/E of 10, we consider that a portfolio P/E ratio of 7.5 (about half the long-run average) should be sufficient to ensure that we are not buying a dangerously distressed set of stocks.
And P/E Ratio > 7.5
With ETFs, liquidity remains another critical factor to consider. If an ETF is too small or trades too infrequently, it can be very difficult to buy or sell shares at their fair value. Thankfully, you do not need to limit yourself to the largest funds in order to find sufficient liquidity for trades of thousands or tens of thousands of dollars. We generally find that ETFs develop sufficient liquidity for the individual investor after they reach assets under management of $50 million or more.