Exchange-traded funds (ETFs) take the guesswork out of investing. They enable anyone to easily build a portfolio that meets their investment needs.
One great way to use ETFs is to generate passive income. You can easily invest in a portfolio of dividend-paying stocks or fixed-income investments. The Schwab U.S. Dividend Equity ETF (SCHD 1.23%), JPMorgan Equity Premium Income ETF (JEPI 0.45%), and iShares 0-3 Month Treasury Bond ETF (SGOV +0.04%) stand out as great ETF options for income-seeking investors to consider buying this February.
Top-notch dividend stocks
NYSEMKT: SCHD
Key Data Points
There are hundreds of great dividend-paying stocks. That can make it difficult to choose the best ones to own. The Schwab U.S. Dividend Equity ETF makes it easy to invest in some of the top dividend stocks through one simple vehicle. It tracks an index focused on companies that pay quality and sustainable dividends.
The ETF currently holds a little over 100 stocks. Its top 10 holdings include notable names such as Verizon, Chevron, and Coca-Cola. Two common threads run through the ETF's holdings. The companies tend to pay higher-yielding dividends (the ETF's distribution yield over the last 12 months is 3.5%, more than double the S&P 500's roughly 1.5% dividend yield). They also have excellent track records of increasing their payouts. Many of the ETF's holdings have increased their dividends annually for over a decade. Because of that, the ETF has historically paid a growing cash distribution to holders.
SCHD Dividend data by YCharts
The Schwab U.S. Dividend Equity ETF gives investors access to a diversified portfolio of high-quality dividend stocks at a minimal cost (the ETF expense ratio is only 0.06%). Because of that, investors get to keep more of the dividend income generated by these stocks.
Dual income generators
NYSEMKT: JEPI
Key Data Points
The JPMorgan Equity Premium Income ETF provides investors with two sources of income: Dividends and income from writing call options. It owns a diversified portfolio of dividend-paying stocks. It holds over 130 stocks, with Microsoft, Mastercard, and Visa currently among its top 10 largest holdings. These stocks generate dividend income that the ETF passes on to investors.
On top of that, it writes out-of-the-money call options on the S&P 500 index. Selling these options generates additional income that the fund pays out to investors.
Over the last 12 months, the ETF has paid an attractive 9.8% yield. Meanwhile, it charges investors a reasonable ETF expense ratio of 0.35%.
However, there is a caveat with this ETF. The income distributions can vary significantly from month to month because volatility significantly affects the income it can generate from writing call options.
JEPI Dividend data by YCharts
That income variability isn't for everyone. However, it's an enticing option for investors who are willing to trade some payment fluctuation for a higher-yielding income stream with higher upside potential.
Cashing in on higher rates
NYSE: SGOV
Key Data Points
The Federal Reserve has significantly increased interest rates over the past couple of years. The Fed Funds Rate is currently between 5.25% and 5.5%. As a result, most fixed-income investments currently offer a higher income yield, including U.S. Treasuries.
The iShares 0-3 Month Treasury Bond ETF focuses on the shortest duration T-bills (those that mature within the next three months). They are the highest-yielding T-bills at the moment because the market expects the Fed to cut rates later this year. This ETF recently had a 30-day yield of around 5.4%.
This ETF makes it easy for investors to put idle cash to work earning a higher yield than they'd likely make on interest paid by their broker. It charges a very low fee (0.07% ETF expense ratio), making it a great option for investors seeking to generate short-term income on their cash.
These top ETFs make it easy to generate more income
ETFs provide investors with many ways to generate more passive income. They also make it easier since investors don't need to take the time to research the best dividend stocks, learn how to trade options, or manage the maturities of a portfolio of T-bills. While there are lots of income-focused ETFs out there, the Schwab U.S. Dividend Equity ETF, JPMorgan Equity Premium Income ETF, and iShares 0-3 Month Treasury Bond ETF are great ones to consider adding to your income portfolio this month.
