3 High-Yield Dividend ETFs to Buy to Generate Passive Income
3 hours ago
Exchange-traded funds (ETFs) are great options for those seeking to generate passive income. Many of these funds hold a portfolio of income-generating investments. Because of that, you don't have to actively manage your portfolio. You can just sit back and watch the income flow into your brokerage account.
The Schwab U.S. Dividend Equity ETF(NYSEMKT: SCHD), JPMorgan Equity Premium Income ETF(NYSEMKT: JEPI), and Vanguard Real Estate ETF(NYSEMKT: VNQ) are three great ETFs for generating passive income. They pay higher-yielding dividends that have grown over the years.
The Schwab U.S. Dividend Equity ETF tracks the Dow Jones U.S. Dividend 100 Index. This index aims to follow the performance of 100 top high-yielding stocks that consistently pay dividends and have stronger financial metrics than their peers.
The fund's holdings feature companies with exceptional records of paying dividends. For example, Pfizer, the fund's top holding, recently declared its 345th consecutive quarterly dividend. The pharmaceutical giant has increased its dividend, which yields a whopping 6.5%, for 16 years in a row. Most of the fund's other top holdings also offer higher-yielding payouts that they've raised each year for a decade or more.
The fund currently offers a distribution yield of 3.6%, based on dividend payments received over the past 12 months. That's roughly triple the dividend yield of the S&P 500 (1.2%). Given that the fund holds stocks with histories of increasing their payments, that income stream should continue its steady rise.
The JPMorgan Equity Premium Income ETF has a dual mandate. The fund aims to distribute income to investors each month while providing lower-volatility exposure to the equity market.
It does that via a two-pronged investment strategy:
Defensive equity portfolio: The fund's managers hold a portfolio of stocks selected based on fundamental research and proprietary risk-adjusted rankings.
Disciplined options overlay strategy: The ETF writes out-of-the-money call options on the S&P 500 index to generate distributable income each month. These options are above the index's current level. It gets paid the premium (value of the option) for writing (shorting) the option.
Writing options can be a very lucrative income-generating strategy.
Image source: JPMorgan Asset Management.
As the chart above shows, the fund has generated an income yield of 8% based on its recent payment (and 7.5% over the last 12 months). That's much higher than other asset classes. The fund's monthly distributions ebb and flow based on the options premium income it generates, which tends to be higher during periods of market volatility.
In addition to that income stream, the fund provides equity market exposure. Because of that, it can produce higher total returns compared to a fixed-income investment, like bonds.
Investing in real estate is among the many ways to generate passive income. However, some real estate investment strategies require more active management (such as owning rental properties). On top of that, the upfront investment can be very high.
The Vanguard Real Estate ETF is one of the easiest and most passive ways to generate income from real estate. The fund focuses on holding real estate investment trusts (REITs) that own income-generating real estate like office buildings, apartment complexes, and warehouses. The fund holds over 150 REITs, giving investors broad exposure to the entire commercial real estate sector.
Its top REIT holding is leading industrial REIT Prologis. The global warehouse owner's dividend currently yields 3.5%. Meanwhile, Prologis has grown its payout at a 13% compound annual rate over the last five years, well above the S&P 500's 5% growth rate.
The ETF currently offers a 3.5% income yield. That income stream should rise in the future as REITs like Prologis continue increasing their dividend payments.
ETFs can be a great way to generate passive income because many of these funds hold portfolios of income-generating investments. The Schwab U.S. Dividend Equity ETF, JPMorgan Equity Premium Income ETF, and Vanguard Real Estate ETF are some of the top options because they pay higher-yielding income streams that should grow in the future. That makes them great ETFs to buy right now if you want to start generating passive income.
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Matt DiLallo has positions in JPMorgan Equity Premium Income ETF and Prologis. The Motley Fool has positions in and recommends Pfizer, Prologis, and Vanguard Real Estate ETF. The Motley Fool recommends the following options: long January 2026 $90 calls on Prologis. The Motley Fool has a disclosure policy.
