Top Dividend-Paying ETFs for Steady Income Growth

Investing in dividend-paying stocks is an effective way to earn income while holding onto your investments. Exchange-traded funds (ETFs) that provide dividends can enhance your investment strategy, making it easier to reach your financial goals.

While ETFs may not offer the thrill of finding a breakout stock, they serve as a reliable way to generate income passively. Here we explore three top dividend-yielding ETFs recommended by Fool.com contributors: the Vanguard Energy ETF (NYSEMKT: VDE), the JPMorgan Equity Premium Income ETF (NYSEMKT: JEPI), and the SPDR S&P Dividend ETF (NYSEMKT: SDY).

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Diversifying Income in the Oil Sector

Daniel Foelber (Vanguard Energy ETF): The energy industry is known for its unpredictable nature, largely influenced by oil and gas prices. When people think of stable dividend stocks, they often consider companies like Coca-Cola or Procter & Gamble.

However, the Vanguard Energy ETF focuses on reliable dividend-paying stocks. Approximately 35.6% of the fund is invested in ExxonMobil and Chevron. ExxonMobil enjoys a 42-year history of increasing dividends, while Chevron follows with 37 consecutive years of hikes. This consistent performance shows both companies’ resilience through various economic challenges since 1987.

In terms of yields, ExxonMobil offers 3.1%, while Chevron provides 4.3%. The ETF itself delivers a yield of 3.3%, significantly higher than the S&P 500 span class=”ticker” data-id=”220472″>(SNPINDEX: ^GSPC) that currently stands at just 1.3%.

Data by YCharts.

The fund includes a variety of companies involved in oil and gas exploration, which represent 26.9% of its holdings, alongside midstream and downstream companies at 23.6%, and oil field services at 10.1%. This diverse selection helps minimize the risk of dividend cuts during tough times.

For those confident in the oil and gas sector’s future, the Vanguard Energy ETF is a strong option. It’s also worth noting that major companies like ExxonMobil and Chevron are investing in low-carbon innovations, such as carbon capture and hydrogen, indicating a shift towards more sustainable energy sources.

With an impressively low expense ratio of 0.1%, this ETF represents a cost-effective method to gain exposure to dividend-yielding energy stocks.

Enter the 7% Yielding ETF

Lee Samaha (JPMorgan Equity Premium Income ETF): Many high-yield ETFs exist, but this one uses a unique approach. Usually, focusing on just one aspect, like dividend yield, can lead to an unbalanced portfolio overweighted in certain sectors.

This ETF distinguishes itself by providing exposure to equities and offers a monthly payout with a current yield exceeding 7%. The fund can invest up to 80% of its assets in stocks and 20% in structured products that sell options on the S&P 500.

Data by YCharts.

This strategy allows the ETF to benefit during market downturns and helps reduce overall portfolio volatility. Notably, the equities portion isn’t limited by dividend requirements, letting the fund invest in various sectors that may lack high yields.

A Balanced Choice for Consistent Passive Income

Scott Levine (SPDR S&P Dividend ETF): There are many ways to create a diversified portfolio, but finding investments that generate a reliable income stream is particularly promising. The SPDR S&P Dividend ETF yields 2.3%, making it an ideal choice for income-focused investors.

Managed by State Street, the ETF aims to replicate the performance of an index comprising high-yield stocks from the S&P 1500 that have consistently raised their dividends for over 20 years. Achieving such consistent growth is a noteworthy feat, making the 133 stocks in this ETF representative of well-established companies that prioritize shareholder returns.

Data by YCharts.

The ETF holds significant investments in consumer staples and industrials, each around 18%. Realty Income, a real estate investment trust (REIT), is the largest single investment at 2.6%, while Southern Company and Chevron follow closely with weightings of 1.9% and 1.8%, respectively.

Concerned about fees? This ETF is accessible, with a manageable expense ratio of 0.35%.

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*Stock Advisor returns as of October 14, 2024

Daniel Foelber holds no position in the stocks mentioned. Lee Samaha holds no position in the stocks mentioned. Scott Levine owns shares in Realty Income. The Motley Fool has positions in and recommends Chevron, EOG Resources, and Realty Income. The Motley Fool recommends Occidental Petroleum. Full disclosure policy available.

The opinions expressed are solely those of the author and do not necessarily represent those of Nasdaq, Inc.