The Global X SuperDividend ETF Pays 10%. Is It Too Good to Be True?

Key Points

• The Global X SuperDividend ETF focuses on high-yielding stocks and it has a lot of exposure to international markets.

• The ETF has generated negative returns over the past five years, although its dividend income has helped to offset those declines.

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Income-seeking investors often invest in exchange-traded funds (ETFs) as a good way to diversify and collect a dividend. However, if the dividend yield is exceptionally high, is it too good to true?

While diversifying via ETFs provides investors with some added safety, it's still important to take a close look at the types of stocks within a fund before investing in it and relying on its payout.

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One high-yielding ETF that may attract investors' attention right now is the Global X SuperDividend ETF (NYSEMKT: SDIV). It's yielding a staggering 10%, which is more than eight times the S&P 500 average of just 1.2%. Could this mouthwatering yield be safe, or is it too good to be true? Here's what you need to know about this ETF.

Image source: Getty Images.

It focuses on high-yielding international stocks

There are 106 holdings in the Global X SuperDividend ETF, which gives investors a fair amount of diversification. One-quarter of the stocks are based in the U.S., but beyond that, it is a very broad-based international portfolio. Hong Kong accounts for 16% of its holdings, followed by Brazil at 9%, and Britain at a little less than that.

Many of the stocks are ones that investors will not be overly familiar with. One of its largest positions is in Ithaca Energy, an oil and gas company based out of Britain. By and large, the stocks in the SuperDividend ETF aren't household names or ones that are known for having impressive track records for paying dividends. Among the more recognizable names is apparel company Guess, which yields 5.4%, but its free cash flow has been negative over the trailing 12 months.

With questionable dividend safety and a high exposure to international markets and tariffs, investors will likely have some serious question marks about the safety of the dividend income from this ETF. And to highlight that point, the following chart shows the decline in the fund's dividend payments in recent years.

SDIV Dividend data by YCharts.

The ETF has declined by 30% over the past five years

Here's a rule of thumb: Dividend income is great, but not when it's used merely to offset capital losses. The SuperDividend ETF hasn't been a good buy in recent years as simply focusing on high-yielding dividend stocks hasn't paid off. The ETF is down 30% in five years, and its total returns (which include dividend payments) during that period come in at just under 20%. That's nowhere near the 97% total return you would have achieved over the same period if you had simply mirrored the market with an S&P 500 ETF.

While past returns aren't indicative of the future, investors should be careful with international stocks, especially in developing markets and where there is a high exposure to U.S. tariffs. The SuperDividend ETF has outperformed the S&P 500 this year (total returns of 24% versus 11%), but that might not be the case over the long haul.

Dividend investors should tread carefully with this ETF

I wouldn't invest in the SuperDividend ETF simply because of the risk that comes with it. The focus seems to be solely on yield, with no indication of there being much of a vetting process for quality or safety, which raises flags as to the quality of the stocks within this ETF.

And rather than going through these stocks one by one, a better option for investors may simply be to focus on safe index funds that pay dividends. While it'll likely mean securing a lower yield in the process, that can be a much better route to take in the long run. Dividend yield alone shouldn't be the primary criterion when picking an investment for your portfolio. Although the SuperDividend ETF may look tempting for its high payout, it's not an investment I'd rely on for recurring income.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.