Juan’s Top Dividend ETFs For 2024

Summary

With the year coming to a close, thought to write an article with a quick summary of my top dividend ETFs for 2024. Right now, I believe that fixed-income markets offer particularly compelling yields, so would focus on these.

Five fixed-income funds stand out due to their competitive yields, strong performance track-record, outstanding risk-return profiles and overall value propositions. In order of credit risk, these are as follows.

The Janus Henderson AAA CLO ETF (JAAA), which focuses on AAA-rated CLO tranches. Credit risk is marginally higher than t-bills, but yields are moderately higher.

The Janus Henderson B-BBB CLO ETF (JBBB), which focuses on BBB-rated CLO tranches. Credit risk is moderately higher than t-bills, but yields are significantly higher.

The iShares Fallen Angels USD Bond ETF (FALN), which invests in fallen angels, or bonds recently downgraded from investment-grade to non-investment grade. Credit risk is high, but total returns have been very strong in the past.

The Panagram BBB-B CLO ETF (CLOZ), which invests in BBB-B rated CLO tranches. Overall risk seems moderate / high, but somewhat uncertain. Total returns have been very strong in the recent past, yields high.

The VanEck BDC Income ETF (BIZD), which invests in BDCs. Risks are much higher than average, but so are yields, dividend growth, returns, and growth potential.

Quick graph with important information for each fund.

In my opinion, the funds above are all strong investment opportunities, and buys. Biggest difference between the funds is their risk-return profile, with JAAA being a bit riskier than t-bills, BIZD being equivalent to leveraged high-yield bonds or equities. As such, no fund is best, but some might be more appropriate for specific investors than others.

As a final point, I wrote a similar article to this one last year. Results were about average, with one fund outperforming, one underperforming, and one performing about the same as its index. Results for the prior one were much stronger, and I do believe that results for this coming year will be quite strong too.

JAAA – AAA-rated CLO ETF

JAAA is an actively-managed ETF focusing on AAA-rated CLO tranches of senior secured loans. Simplifying things a bit, we can say that JAAA invests in bundles of corporate loans, and that the fund receives priority, senior payments from these.

As fund payments are prioritized, credit risk is extremely low. Default rates for AAA-rated CLOs are equal to zero. Default rates for AA and A rated ones functionally equivalent to zero.

JAAA is a variable rate fund, so interest rate risk or exposure is close to zero as well.

JAAA is somewhat more volatile than t-bills, but still a comparatively stable, safe fund relative to bonds and equities.

JAAA currently yields 6.1%, a bit higher than t-bills. It sports a 6.8% SEC yield, a more forward-looking yield metric.

The fund has outperformed most bonds and bond sub-asset classes since inception. Good timing played a role, as the fund is variable rate and was created one year before an unprecedented set of Fed rate hikes.

In my opinion, JAAA is a strong investment opportunity, and particularly appropriate for short-term investors willing to take a marginal amount of risk. I last covered JAAA here.

JBBB – BBB-rated CLO ETF

JBBB is an actively-managed ETF investing in BBB CLO tranches of senior secured loans. Simplifying things a bit, we can say that JBBB invests in bundles of corporate loans, and that the fund receives payments from these. Payments are in the middle of the pack in terms of seniority.

In practice, credit risk is extremely low, as the fund’s payments are senior enough. As per S&P, BBB-rated CLO tranches have an annual default rate of only 0.01%. Default rates do increase long-term and during downturns and recessions, but these remain very low regardless.

JBBB is a variable rate fund, so interest rate risk or exposure is close to zero as well.

JBBB is quite a bit more volatile than expected for a fund with its characteristics. Still, volatility is low on an absolute basis, and much lower than the bond and high-yield bond average.

JBBB currently yields 8.0%, an incredibly compelling yield for a fund with low credit risk, interest rate risk, and volatility. It sports an 8.8% SEC yield, a more forward-looking yield metric.

The fund has outperformed most bonds and bond sub-asset classes since inception. Performance was somewhat worse than expected, however, as conditions have been very favorable for the fund since inception. Still, performance remains strong, especially so in the more recent past.

In my opinion, JBBB is a strong investment opportunity. It also seems to offer a particularly compelling risk-return profile, with an 8.0% yield and comparatively low risk and volatility. I last covered JBBB here.

FALN – Fallen Angels ETF

FALN invests in fallen angels, or bonds recently downgraded from investment-grade to non-investment grade. As an example, a bond with a BBB rating downgraded to BB would quality as a fallen angel.

Fallen angels tend to outperform broader high-yield bond indexes due to structural issues with bond markets and bond investors. In simple terms, some institutional investors are constrained from holding non-investment grade bonds in their portfolios, so are forced into selling any bond downgraded from investment-grade to non-investment grade.

As an example, the Vanguard Total Bond Market Index Fund ETF Shares (BND), the largest bond market ETF in the market with over $300 billion in assets only invests in investment-grade bonds. If a bond within its portfolio is downgraded to non-investment grade, BND must sell said bond. Forced selling causes prices to drop, yields to spike. Buying said bond should generate above-average capital gains and dividends, which is what FALN and fallen angel indexes do.

Due to the above, fallen angels tend to outperform broader bond indexes:

and FALN tends to outperform most bonds and bond sub-asset classes:

On the other hand, FALN has quite a bit of credit risk, due to focusing on non-investment grade bonds.

Interest rate risk is a bit lower than average, as the fund is tilted towards short-term bonds, underweight long-term securities.

FALN sports a 5.3% dividend yield, and a 6.9% SEC yield. Although both are reasonable figures, they are not particularly high, and are somewhat lower than average for a high-yield corporate bond ETF. As an example, the SPDR Portfolio High Yield Bond ETF (SPHY) yields 7.3%, 2.0% more than FALN, with roughly comparable risk.

In my opinion, FALN is a strong investment opportunity, and it has the strongest, most time-tested investment strategy. Still, the fund’s yield is not particularly high, which might be a deal-breaker for some investors. I last covered FALN here.

CLOZ – BB-rated CLO ETF

CLOZ is an actively-managed ETF investing in BB CLO tranches of senior secured loans. Similar to JBBB, but with a bit more credit risk and yield.

CLOZ’s credit risk is technically extremely low, as senior loans almost always produce sufficient income to pay for the dividends on BB-rated CLO tranches. S&P has annual default rates at 0.02%. These increase during downturns, recessions, and long-term, but almost always remain low regardless.

Although the figures above are accurate, I believe that they somewhat understate CLOZ’s credit risk. Remember, CLOZ focuses on more junior CLO tranches, and these are some of the first to see losses from defaults and bankruptcies. Senior tranche dividends are prioritized, and during severe recessions perhaps there will only be enough cash to pay senior tranche dividends, with more junior tranches receiving nothing.

CLOZ is a variable rate fund, so interest rate risk or exposure is close to zero as well.

CLOZ has experienced below-average volatility since inception, somewhat in-line with fundamentals, but higher than I personally expected.

CLOZ sports a 10.4% dividend yield, and a 10.1% SEC yield.

CLOZ’s performance track-record is outstanding, with the fund significantly outperform most bonds and bond sub-asset classes since inception. CLOZ achieved almost twice the returns of high-yield corporate bond indexes, and with lower volatility to boot.

In my opinion, CLOZ is an incredibly strong investment opportunity. Still, I would like to mention that I believe the fund to be riskier than it seems / looks at first glance. CLOZ got a bit lucky with timing, being created during a period of significant rate hikes plus market gains. I last covered CLOZ here.

BIZD – BDC ETF

BIZD invests in business development company, or BDCs. BDCs provide financing to corporations. Said financing generally takes the form of floating rate loans to smaller, riskier, companies with weak credit ratings. BDCs are generally leveraged. Details and percentages vary.

Credit risk is high, as BDCs tend to focus on smaller, riskier issuers.

Interest rate risk is low, as BDC loans tend to be variable rate. Dividends are dependent on other factors too, including asset growth in the underlying BDCs.

Overall volatility is generally high, although has precipitously declined these past few months.

BIZD sports a 11.0% dividend yield, and a 10.2% SEC yield. Dividends have seen double-digit growth these past twelve months, due to a combination of higher rates and underlying asset growth. Dividends could see further growth next year, due to the latter.

In my opinion, BIZD is a strong investment opportunity, and offers particularly high dividends, potential dividend growth and total returns. It is a risky choice, however. I last covered BIZD here.

Special Mention – BOXX

Although not strictly a dividend ETF, thought to have a quick discussion on the Alpha Architect 1-3 Month Box ETF (BOXX). BOXX achieves comparable returns to t-bills through equity options. The graph is uncanny.

BOXX does have two advantages to t-bills.

First, returns are sometimes marginally higher. This has been the case since inception and will almost certainly be the case at current prices and yields.

Second, the fund should provide some investors with some tax benefits. Specifically, BOXX’s strategy sometimes avoids generating any (taxable) net investment income or realized capital gains, allowing the fund to retain any and all income within the fund. BOXX does not currently pay a dividend, as expected.

Investors in BOXX can choose to hold the fund long-term, potentially delaying taxes until a moment of their choosing. Doing so could, potentially, result in tax savings.

In my opinion, BOXX is an incredibly strong cash alternative fund. It has almost no significant downsides compared to t-bills, and some important (potential) benefits. I last covered BOXX here.

Conclusion

Several dividend ETFs offer investors strong, growing, fully-covered dividends. Of these, JAAA, JBBB, FALN, CLOZ and BIZD look like particularly compelling choices right now. These are all strong investment opportunities, and buys.