Exploring High-Yield ETFs: Your Guide to Passive Income Investment
Discover how dividend-paying ETFs can enhance your investment strategy.
Passive income is an attractive way to earn money without active involvement. Several sources exist, such as rental income and bond interest, but one effective method is through dividend-paying stocks. These investments not only provide dividend income but also potential stock price growth. Given the complexity of finding the best dividend payers, many investors opt for exchange-traded funds (ETFs) that focus on dividend income.
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ETFs function like stocks and often aim to track a specific index. Below are nine high-yield ETFs worth considering. Keep in mind that while some have high current yields, others may have lower yields that could increase faster over time.
Understanding Dividend-Paying ETFs
Though these ETFs focus on income generation, other options like the S&P 500 index fund also pay dividends. In fact, many companies within the S&P 500 provide dividends, with the index recently yielding around 1.3%.
Here’s a selection of dividend-focused ETFs, along with an S&P 500 index fund for comparison. The varied options allow flexibility based on your investment needs, especially if your workplace 401(k) includes any listed funds.
|
ETF |
Recent Yield |
5-Year Avg. Annual Return |
10-Year Avg. Annual Return |
|---|---|---|---|
|
iShares Preferred & Income Securities ETF (NASDAQ: PFF) |
6.00% |
3.11% |
3.95% |
|
SPDR Portfolio S&P 500 High Dividend ETF (NYSEMKT: SPYD) |
4.18% |
8.67% |
N/A |
|
Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) |
3.61% |
13.05% |
12.02% |
|
Fidelity High Dividend ETF (NYSEMKT: FDVV) |
2.87% |
14.91% |
N/A |
|
Vanguard High Dividend Yield ETF (NYSEMKT: VYM) |
2.65% |
11.34% |
10.53% |
|
iShares Core Dividend Growth ETF (NYSEMKT: DGRO) |
2.24% |
12.59% |
12.49% |
|
SPDR S&P Dividend ETF (NYSEMKT: SDY) |
2.22% |
9.55% |
10.42% |
|
Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) |
1.65% |
12.93% |
12.33% |
|
First Trust Rising Dividend Achievers ETF (NASDAQ: RDVY) |
1.49% |
15.05% |
13.21% |
|
Vanguard S&P 500 ETF (NYSEMKT: VOO) |
1.3% |
16.07% |
13.70% |
Data source: Morningstar.com, as of Oct. 22, 2024.
Here’s a brief overview of each fund:
- iShares Preferred & Income Securities ETF: Contains 443 U.S. preferred stocks and hybrid securities, which typically offer stable but limited growth.
- SPDR Portfolio S&P 500 High Dividend ETF: Invests in the 80 stocks with the highest yields from the S&P 500 index.
- SPDR S&P Dividend ETF: Comprises about 133 stocks from the S&P 1500 Composite Index that have raised their dividends for at least 20 years.
- Schwab U.S. Dividend Equity ETF: Tracks the Dow Jones U.S. Dividend 100 Index, focusing on 100 high-yield U.S. stocks.
- Vanguard High Dividend Yield ETF: Follows the FTSE High Dividend Yield Index and includes approximately 550 high-yield companies.
- First Trust Rising Dividend Achievers ETF: Targets around 50 companies known for increasing dividends consistently.
- Vanguard Dividend Appreciation ETF: Tracks the S&P U.S. Dividend Growers Index, highlighting 340 large-cap stocks with a history of dividend increases.
- iShares Core Dividend Growth ETF: Focuses on about 400 U.S. stocks with stable and growing dividend payouts.
- Fidelity High Dividend ETF: Comprises around 107 medium and large companies likely to sustain and grow their dividends.
Making Your Investment Choice
The options above can be numerous, so consider these factors:
- If your employer’s 401(k) plan uses Fidelity, Schwab, or Vanguard, you may have access to one or more of these funds in your investment selections.
- There is often a balance between growth potential and yield; for instance, the iShares Preferred ETF offers the highest yield but limited growth.
- Conversely, the S&P 500 index fund at the bottom has the lowest yield yet shows the highest average gains over time.
- Diversifying your investments between funds with higher yields and those likely to appreciate can be a wise strategy.
Maximizing Your Investment: The Importance of Dividend Growth in ETFs
The Hidden Value of Small Dividends
- Investors should recognize the significance of dividend growth. It’s essential not to overlook smaller dividends, especially those that are rapidly increasing. For instance, Automatic Data Processing recently had a yield of 1.93%. A closer look at its dividend history reveals an annual dividend of $5.60 per share, which has risen from $4.37 in 2022 and $3.28 in 2019. Opting for ETFs that offer smaller yet swiftly growing dividends can be a wise long-term investment strategy.
Exploring Alternative Income Sources
If you’re targeting ETFs with high passive income, consider those investing in junk bonds, options, or those designed for lower volatility.
Before purchasing shares in iShares Preferred and Income Securities ETF, it’s crucial to weigh some factors:
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Selena Maranjian is an investor in Schwab U.S. Dividend Equity ETF. The Motley Fool holds and recommends positions in Vanguard Dividend Appreciation ETF, Vanguard S&P 500 ETF, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are those of the author and do not represent those of Nasdaq, Inc.
