4 High-Yield Dividend ETFs to Buy to Generate Passive Income
Buying exchange-traded funds (ETFs) is an easy way to earn passive income. They require minimal active management, making them truly passive investments.
Schwab US Dividend Stock ETF(NYSEMKT:SCHD) passively monitors a directory (Dow Jones US Dividend 100 Index) is an index that measures the performance of the 100 highest-yielding dividend stocks. This index screens stocks based on four dividend quality characteristics, including dividend yield and five-year growth rate.
The Schwab US Dividend Stock ETF restructures its holdings annually, adding top-quality dividend stocks and discarding lower-quality holdings. At its last update last March, the fund’s 100 holdings had returned an average of 3.8% and had increased payouts at an annual rate of 8.3% over the past five years. The highest quality dividend stocks have the greatest weighting in the fund. (The weight of the highest current holding is 4.4%.)
This ETF’s focus on tracking an index that screens stocks for both return and growth ensures it offers an attractive, ever-increasing income stream. It currently yields 3.8%. For perspective, investors can earn $3.80 in passive income for every $100 invested at this rate.
Meanwhile, thanks to its dividend growth, the ETF has increased its income payments to investors by more than 500% since its inception in 2011. The passively managed fund charges investors a very low ETF expense ratio of 0.06%, allowing them to retain more of the dividend income from their holdings.
Pacer Global Cash Cows Dividend ETF(NYSEMKT:GCOW) It is a strategy focused ETF. It aims to provide investors with a stable income stream and capital appreciation by screening companies with high free cash flow yield and high dividend yield.
It starts with the 1,000 largest companies, lists the 300 stocks with the highest free cash flow yield, and narrows it down further to the 100 stocks with the highest dividend yield. The fund holds the remaining 100 companies, weighted by dividend yield, with the top holding limited to 2% of its assets.
These assets currently have an average free cash flow yield of 6.2% and a dividend yield of 4.7%. However, the income return provided by the fund to investors is close to 4% due to the high ETF expense ratio (0.6%). In exchange for this higher cost, an actively managed fund offers investors the potential to generate more income and capital gains than a passively managed fund.
SPDR Portfolio S&P 500 High Dividend ETF(NYSEMKT:SPYD) It is a passively managed dividend ETF. Tracks your performance S&P 500 High Dividend IndexSelects the 80 companies with the highest returns S&P 500 and keeps these stocks in equal weights. This passively managed fund also has a low ETF expense ratio (0.07%).
The average dividend yield of the 80 companies held by the fund is 4.5%. Considering the underlying index that the SPDR Portfolio S&P 500 High Dividend ETF tracks, which focuses on yield above all else, the fund delivers lower dividend growth. The fund’s payouts have increased less than 50% since its inception in 2015. The investment strategy of the fund makes it ideal, above all, for those who want to achieve high income.
Vanguard Real Estate ETF(NYSEMKT:VNQ) It invests in companies that own commercial real estate such as office buildings, apartment complexes and industrial facilities. Most of its assets consist of real estate investment trusts (REITs). These entities are required to distribute 90% of their taxable income to investors through dividends; This makes them ideal passive income investments.
Purchasing the Vanguard Real Estate ETF is one of the simplest ways to earn passive income from real estate. The passively managed fund currently holds more than 150 real estate stocks, with the largest REITs having the largest allocations in the fund (the largest holding is 6.6% of its assets).
As a result, it provides investors with broad access to the REIT sector, led by the largest companies. The fund charges investors a reasonable expense ratio of 0.13% for the ease of generating passive income from the real estate sector (3.6% current yield).
Each of these ETFs offers different advantages. SCHD balances yield and growth; GCOW prioritizes both income and capital gains with a higher expense ratio; SPYD focuses on maximizing the S&P 500’s dividend yield at the expense of slower growth; and VNQ uniquely targets the real estate industry from a revenue perspective. You can choose an ETF based on your income goals and growth preferences, or combine them for broader diversification.
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Matt DiLallo It has positions in the Schwab US Dividend Equity ETF. The Motley Fool holds positions in and recommends the Vanguard Real Estate ETF. The Motley Fool has a feature disclosure policy.
