Exchange-traded funds (ETFs) make it super easy to be a passive investor. They offer instant, built-in diversification, meaning you don't need to actively construct and manage a portfolio.
These characteristics make ETFs ideal for those seeking to generate passive income. Two great dividend ETFs for passive income are JPMorgan Nasdaq Equity Premium Income ETF (JEPQ 0.18%) and Schwab U.S. Dividend Equity ETF (SCHD 0.27%). The ETFs offer high-yielding dividends, making them ideal for passive income production.
A premium income stream
JPMorgan Nasdaq Equity Premium Income ETF aims to provide investors with a monthly income stream and equity upside exposure to the Nasdaq-100 with less volatility. The ETF primarily generates income by writing out-of-the-money call options on the Nasdaq-100. Selling call options generates options premium income, which the fund distributes to investors each month.
This lucrative strategy has enabled the fund to generate a higher income yield than other asset classes:
Data source: JPMorgan.
The ETF's distribution payments vary from month to month based on the options premium income it generates, which tend to fluctuate with market volatility. The fund also earns dividend income by holding stocks in the Nasdaq-100, like Nvidia and Intel.
That stock portfolio provides investors with equity upside. The fund uses data science and fundamental research to construct a portfolio that should deliver strong returns. That approach enabled the ETF to outperform the Nasdaq-100 in the first quarter, as a higher weighting to Nvidia and a lower weighing of Intel bolstered its returns.
This actively managed fund charges a very reasonable ETF expense ratio of 0.35%. It's ideal for those who are seeking a higher income stream and are OK with payments that can vary significantly each month.
Focused on high-quality, high-yielding dividend stocks
Schwab U.S. Dividend Equity Fund tracks the Dow Jones U.S. Dividend 100 Index. That index aims to follow the performance of 100 top high-yielding dividend stocks that have consistently paid dividends and have strong financials compared to their peers. The fund collects these dividends and distributes them to investors each quarter. Its last dividend payment had an annualized dividend yield approaching 3.5%, significantly higher than the 1.3% dividend yield of an S&P 500 index fund.
While the fund holds around 100 dividend stocks, the top 10 comprised nearly 40% of its assets:
|
Dividend Stock |
Fund Weighting |
Current Yield |
Dividend History |
|---|---|---|---|
|
Texas Instruments |
4.1% |
2.6% |
20 consecutive annual increases |
|
Bristol-Myers Squibb |
4% |
5.7% |
15 consecutive annual increases |
|
4% |
2.7% |
21 consecutive annual increases |
|
|
4% |
3% |
52 consecutive annual increases |
|
|
4% |
6.7% |
17 consecutive annual increases |
|
|
Cisco Systems |
3.9% |
3.4% |
12 consecutive annual increases |
|
3.9% |
4.1% |
37 consecutive annual increases |
|
|
3.9% |
2.6% |
15 consecutive annual increases |
|
|
Pfizer |
3.9% |
5.8% |
31 consecutive annual increases |
|
Amgen |
3.9% |
2.9% |
12 consecutive annual increases |
Data source: Company press releases and Koyfin.
The fund has a fairly diversified portfolio of dividend stocks. Its top holdings pay dividends with above-average yields. They also have long records of increasing their payouts.
This passively managed ETF provides access to these high-quality, high-yielding dividend stocks at a low cost (0.06% ETF expense ratio). Because of that, investors keep more of the steadily rising income this fund generates.
High-quality, high-yielding ETFs
JPMorgan Nasdaq Equity Premium Income ETF and Schwab U.S. Dividend Equity ETF are great vehicles for generating passive income. They offer higher-yielding payouts that will provide their investors with more income for every dollar they invest. That enables investors to sit back and watch the income flow into their accounts.
