ETFs
4 High-Yield Dividend ETFs to Generate Passive Income
These four exchange-traded funds offer attractive income potential depending on your risk tolerance.
Generating passive income can be very appealing to some investors. The idea of earning a steady stream of cash from investments without having to work for it is appealing, whether you need it to supplement your income from work or to supplement your Social Security income.
One way to generate this passive income is to invest in exchange traded funds (ETFs) Designed to generate dividends, these ETFs hold a selection of individual stocks based on specific criteria and offer a simple way to diversify your portfolio with a single investment.
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The trick, of course, is to choose wisely. Sometimes, higher dividend-yielding options that could provide more passive income also come with a higher risk that the dividend will be negatively affected by changes in the economy. It can be wise to err on the side of caution in this case, as no one wants to see their dividends cut. You can diversify even further by investing in a select group of ETFs that each target different sectors, geographies, and/or industries.
To help investors find the right ETF for their specific needs, here are four ETFs that offer a range of yields, exposure to different sectors and geographies, and varying expense ratios. Each of these four ETFs can help you generate the passive income you desire.
1. Schwab U.S. Dividend Stock ETF
THE Schwab US Dividend Stock ETF (SCHD 0.03%) is designed to track the Dow Jones US Dividend 100 Index. This index contains high-yielding U.S. stocks that have a proven track record of paying dividends. It also selects companies based on their strength, as measured by analyzing financial numbers.
The stocks that make up this index come from several sectors, offering solid diversity, with financials representing the largest weighting (17.4%). This is followed by health care (15.7%), consumer staples (13.9%), industrials (13.5%) and energy (12.8%).
By indexing passivelyThe ETF’s expense ratio remains low (0.06%), meaning that more of the profits go to the investor rather than SchwabThe fund generates a return of 3.8%, more than triple the average return S&P 500 shares (1.3%).
2. iShares International Select Dividend ETF
THE iShares International Select Dividend ETF (IDV -0.53%) provides exposure to high dividend paying companies outside the United States. It invests in companies in Europe, the Pacific and Asia regions, as well as Canada (EPAC).
Its expense ratio is relatively high at 0.53%, but it also offers a solid yield of 5.9%.
The financial sector is the largest with a weighting of over 31%. It is followed by utilities (16.1%), communications (11.5%), materials (9.8%) and energy (8.3%). The ETF has invested most of its assets in Europe, with the UK having the largest country weighting at 23.5%, followed by Italy at 10.1%, and Spain at 8.8% completing the top three.
Composed of around 100 stocks, this passive ETF tracks the evolution Dow Jones EPAC Select Dividend Index.
3. iShares iBoxx High Yield Corporate Bond ETF
THE iShares iBoxx High Yield Corporate Bond ETF (HYG -0.12%) tries to follow the Markit iBoxx USD Liquid High Yield IndexAs the name suggests, it invests in high-yield corporate bonds denominated in US dollars.
High yield bonds are issued by companies with a rating below investment grade: BB+ or lower according to the major rating agencies, S&P Global, Moody’sand Fitch Ratings. This indicates that they present a higher credit risk than companies with an investment grade rating.
But investors willing to take on a higher risk will receive a bigger reward: the ETF has a yield of 7.4%. Investors should also note that its expense ratio is 0.49%.
4. Vanguard High Dividend Yield ETF
THE Vanguard High Dividend Yield ETF (VYM 0.03%) invests passively, following the evolution FTSE High Dividend Yield Index. This includes US stocks with a high forecast for yield.
The ETF has its largest sector weighting in financials at 20.7%. It is followed by industrials (12.6%), health care (11.7%), consumer staples (11.1%) and energy (10.6%). Technology has a weighting of 10.1%. It has a yield of 2.8% and a low expense ratio of 0.06%.
Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Charles Schwab, Moody’s, S&P Global, and Vanguard Whitehall Funds – Vanguard High Dividend Yield ETF. The Motley Fool recommends the following options: short September 2024 $77.50 calls on Charles Schwab. The Motley Fool has a position in … disclosure policy.