When High Yield Isn't High: After-Tax ETF Returns

Investors love anything claiming to be high yield.
For taxable investors, headline yields are an illusion and this post shows after-tax returns for popular high yield ETFs.
High Yield Bonds
Let’s start with the poster child for high yield ETF investing: iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA: HYG), the $18-billion corporate bond fund.
Graphs are based on current tax rates and assume an investor is in the highest federal bracket and lives in a state with high income taxes.

HYG has compounded at 5% since 2007. After-tax returns have been half of that because corporate bond interest is subject to federal and state tax. A high-income investor in a taxable account could have outperformed HYG with much less risk.
Dividend ETFs
As Meb Faber pointed out, dividend investing is like Coke (NYSE: KO) and Ferrari (NYSE: RACE) in that it has a great brand.
We’ve all seen charts showing the outperformance of dividend stocks. But this has partially been because dividend stocks have historically traded at a lower valuation than the overall market. That’s no longer the case.
Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) paid one $0.10 dividend in 1967 and Buffett joked, “I must have been in the bathroom when the decision was made.”
This chart shows returns for DVY, the iShares Select Dividend ETF:

There’s less tax drag than HYG since more of DVY’s return came from capital appreciation. Plus,... Read more