3 High-Yield Dividend ETFs Paying Up to 7.8%

High-yield dividend ETFs, as the term suggests, predominantly invest in assets that produce a higher-than-average amount of dividend income. They do so by targeting specific corners of the U.S. stock market or equities in different parts of the world, or in some cases, they even use a few special market mechanisms to squeeze more juice from the dividend fruit.

The primary benefit of investing for yield via an ETF instead of an individual stock is that by spreading out your assets across dozens, hundreds, even thousands of different investments, you reduce the risk of any single security's collapse deep-sixing your portfolio.

Let me shine a light on some high-yield dividend ETFs paying up to 7.8% annually, which  a group of high-yield dividend ETFs that pay between 3.6% and 8% annually, which is roughly three to nine times better than the broader market.

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How Were These High-Yield Dividend ETFs Selected?

First, these are dividend ETFs. In other words, this list is limited to funds that own stocks; bond funds don't apply.

Next is the yield floor. There's no universal definition of "high yield"; much like beauty, a high dividend is in the eye of the beholder. But given that it's a list of high-dividend ETFs, I have to set the floor somewhere, and that somewhere is 3.5%. That ensures you'll earn well more than double (and in most cases, many times more) what you'd collect by investing in an S&P 500 index fund.

Lastly, as a quality check, I've only included dividend ETFs that have earned a Morningstar Medalist rating—Morningstar's forward-looking analytical view of the fund—of at least Bronze. A quick explanation of why that matters, per Morningstar:

"For actively managed funds, the top three ratings of Gold, Silver, and Bronze all indicate that our analysts expect the rated investment vehicle to produce positive alpha relative to its Morningstar Category index over the long term, meaning a period of at least five years. For passive strategies, the same ratings indicate that we expect the fund to deliver alpha relative to its Morningstar Category index that is above the lesser of the category median or zero over the long term."

A Medalist rating doesn't mean Morningstar is necessarily bullish on the underlying asset class or categorization. It's merely an expression of confidence in the fund compared to its peers.

From the remaining universe of ETFs to choose from, I picked ETFs from a variety of sectors, geographies, and strategies. I also selected funds that have reasonable expense ratios—given their specialties, many of these cost more than a bland broad-market ETF, but they're fair or low for their category.

The following are three of the picks from my broader list of the best high-yield dividend ETFs.

First Trust Morningstar Dividend Leaders Index Fund

• Assets under management: $7.8 billion
• Dividend yield: 3.6%
• Expense ratio: 0.43%, or 4.30 per year on every $1,000 invested
• Morningstar Medalist rating: Bronze

When it comes to long-term performance, U.S. stocks have historically been king. The same tends to go with dividend-growth stocks—American dividend growers are pretty prolific, so much so that the qualifications to be a Dividend Aristocrat here require more years of uninterrupted dividend growth than similar international groupings.

But it is really, really difficult to find highly-rated broad baskets of generous U.S. payers.

The First Trust Morningstar Dividend Leaders Index Fund (FDL) is one of these rare gems. It's an index fund that starts with a universe of U.S. stocks that pay qualified dividends, which are given preferential tax treatment. This includes most dividend stocks you can think of, but backs out a few categories such as real estate investment trusts (REITs).

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From there, companies must have positive five-year indicated dividend-per-share growth, and their one-year estimated earnings per share (EPS) divided by indicated dividend per share must be less than or equal to 1. The stocks that remain are ranked by their indicated yield, and as many as the top 100 are included in the index. Lastly, stocks are weighted by the dollar value of their indicated dividends.

The current result of that screening process is a bundle of 85 stocks that's concentrated in many of the sectors you'd expect: energy, healthcare, and consumer staples are tops right now. Financial services also make up a meaningful double-digit weight. Top holdings are no-brainer high yielders such as Chevron (CVX), Verizon (VZ), and Pfizer (PFE).

Concentration risk can be an issue here thanks to the dividend weighting. Right now, for instance, CVX, VZ and PFE alone account for more than 20% of the fund's assets.

Still, you're earning more than three times the S&P 500's yield. So if you're looking to extract high yield from American blue-chip stocks, FDL is one of the best high-yield dividend ETFs to buy.

Related: 8 Best High-Yield Dividend Stocks: The Pros' Picks

iShares International Select Dividend ETF

• Assets under management: $8.5 billion
• Dividend yield: 5.1%
• Expense ratio: 0.50%, or $5.00 per year on every $1,000 invested
• Morningstar Medalist rating: Silver

Any group of favorably rated high-yield dividend ETFs is bound to include at least a couple international stock funds. Large, established dividend payers abroad—especially in developed countries—have for years tended to pay more than their U.S. counterparts, in part because the long-term outperformance of U.S. stocks has depressed yields.

The iShares International Select Dividend ETF (IDV) is a straightforward basket of overseas stocks. It's another index fund—one that doesn't care about volatility, just relatively high payments. 

Related: 5 Dandy Dividend-Growth ETFs to Buy Now

IDV's 100-stock portfolio is a roughly 70/25/5 blend of large-, mid-, and small-cap stocks from across the developed world, predominantly Europe. The U.K., France, Spain, and Italy all enjoy double-digit weights at the moment. There's precious little emerging-market exposure; that's South Korea, which one could argue is a developed market but nonetheless still finds itself in some emerging indexes.

While the portfolio does have quite a few multinationals that are well-known here in the States, the top weights are reserved for the likes of French integrated giant TotalEnergies (TTE), Italian utility Enel (ENLAY), and Spanish telecommunications firm Telefónica (TEF). Collectively, this portfolio puts out a 5%-plus yield at the moment.

The 0.5% annual fee isn't exactly low in a bubble, but it's within the cheapest quintile across its Morningstar category (Foreign Large Value), so you're getting a relatively cheap fund.

Related: 10 Best Dividend Mutual Funds You Can Buy Now

InfraCap MLP ETF

• Assets under management: $468.9 million
• Dividend yield: 7.8%
• Expense ratio: 1.72%*, or $17.20 per year on every $1,000 invested
• Morningstar Medalist rating: Silver

Master limited partnerships aren’t a type of energy company—they’re an overall business structure that’s applicable to numerous industries. They’re considered “pass-through entities” because income isn’t taxed at the corporate level—it’s “passed through” to owners and “unitholders” (the MLP equivalent of shareholders) via “distributions” (the MLP equivalent of dividends). 

However, many publicly traded MLPs are energy-related. These companies are typically involved in energy infrastructure—that means pipelines, storage, terminals, and other assets involved in the transportation and holding of oil, gas, and other energy commodities. They also happen to be among the market's higher yielders; while they don't necessarily have a mandate for distributions the way REITs do, they often distribute most if not all of their available cash flows.

The InfraCap MLP ETF (AMZA) is an actively managed ETF that owns a small grouping of MLPs. Managers Jay Hatfield and Andrew Meleney have put together a portfolio of just around 35 infrastructure names, and it's currently hyper-concentrated in six stocks: Energy Transfer LP (ET), Sunoco LP (SUN), Plains All American Pipeline LP (PAA), Western Midstream Partners LP (WES), MPLX LP (MPLX), and Enterprise Products Partners LP (EPD) currently account for 83% of the fund's assets.

Related: 7 Best Online Brokers in Canada

Importantly: MLP distributions are primarily made up of tax-deferred return of capital, with the remainder typically considered ordinary income. MLPs even require an additional form—the K-1—come tax time. However, InfraCap's fund is structured as a C corporation, and instead issues a Form 1099-DIV, which allows investors to avoid the more complex K-1, simplifying tax reporting.

AMZA is also a rarity in that it's a monthly dividend payer (most equity dividend ETFs pay quarterly).

* AMZA's management fee is 0.95%. Additional fees are typically attributed to "income tax expenses,” which are an estimate of the potential tax expense (or benefit) that would occur if the fund recognized any unrealized gains or losses in the portfolio. This is common among funds that hold MLPs. This can vary widely from year to year and even day to day.

Learn More About These and Other Funds With Morningstar Investor

If you're buying a fund you plan on holding for years (if not forever), you want to know you're making the right selection. And Morningstar Investor can help you do that.

Morningstar Investor provides a wealth of information and comparable data points about mutual funds and ETFs—fees, risk, portfolio composition, performance, distributions, and more. Morningstar experts also provide detailed explanations and analysis of many of the funds the site covers.

With Morningstar Investor, you'll enjoy a wealth of features, including Morningstar Portfolio X-Ray®, stock and fund watchlists, news and commentary, screeners, and more. And you can try it before you buy it. Right now, Morningstar Investor is offering a free seven-day trial and a discount on your first year's subscription when you use our exclusive link.

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Disclaimer: This article does not constitute individualized investment advice. Individual securities, funds, and/or other investments appear for your consideration and not as personalized investment recommendations. Act at your own discretion.