Who wouldn't want passive income? By definition, it's cash that just comes to you without you toiling for it. You don't have to work at a job, inherit money from a wealthy relative, or even rob a bank for this money.
There are many potential sources of passive income, and not all will appeal to everyone. You might buy properties and rent them out, for example -- but that does require occasional effort and some real estate savvy. Buying a fixed annuity can set you up to collect monthly payments, too, but you'll typically need to fork over a significant sum for that annuity first.
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Five compelling high-dividend ETFs
So consider high-dividend exchange-traded funds (ETFs). They operate much like mutual funds, but they trade like stocks, and some sport solid dividend yields while delivering potential growth, too. Here are five to look into further -- plus a bonus.
|
ETF |
Recent Yield |
Five-Year Annualized Return |
10-Year Annualized Return |
|---|---|---|---|
|
iShares Preferred & Income Securities ETF (PFF +0.64%) |
6.33% |
2.38% |
3.41% |
|
Schwab U.S. Dividend Equity ETF (SCHD +0.25%) |
3.83% |
11.60% |
10.69% |
|
Vanguard Real Estate ETF (VNQ +0.29%) |
3.82%* |
2.28% |
5.16% |
|
Vanguard High Dividend Yield ETF (VYM +0.19%) |
2.80% |
9.74% |
9.35% |
|
iShares Core Dividend Growth ETF (DGRO 0.11%) |
2.42% |
11.21% |
11.28% |
|
Vanguard S&P 500 ETF (VOO +0.82%) |
1.29% |
14.95% |
12.81% |
Source: Morningstar.com, as of June 24, 2024.
*Vanguard doesn't provide an SEC yield. This is the ETF's recent "unadjusted effective yield."
If the table above doesn't seem sufficiently exciting, this might help: Imagine that you have -- or retire with -- a $500,000 portfolio that sports an overall average dividend yield of 3.5%. That's enough to generate $17,500 in passive income each year. If you're currently earning, say, $80,000 annually, that's like collecting an extra 22% bonus annually.
Now that you're more interested in these ETFs, let's take a brief look at each of them.
iShares Preferred & Income Securities ETF
This ETF specializes in preferred stocks, not the common stocks that most of us invest in most of the time. Don't expect preferred stocks to appreciate in value very much, or for their dividend payouts to grow a lot, either. They often pay fixed dividends, but they also often feature outsized yields.
NASDAQ: PFF
Key Data Points
Schwab U.S. Dividend Equity ETF
This index fund tracks the Dow Jones U.S. Dividend 100 index, which consists of high-yielding U.S. stocks that have consistently paid dividends. Its biggest holdings recently were Texas Instruments, Amgen, and Lockheed Martin.
Vanguard Real Estate ETF
Real estate investment trusts (REITs) own lots of properties and earn income by renting them out. Since owning actual properties can be tricky and costly, if you want to profit from real estate, you might consider instead investing in an ETF like this one. Owning a REIT can be thought of as "the really lazy way to be a landlord." This ETF's top holdings recently included Prologis, American Tower, and Equinix. Respectively, they specialize in warehouses, telecommunication towers, and digital infrastructure, among other things.
Vanguard High Dividend Yield ETF
This ETF aims to replicate the returns of the FTSE High Dividend Yield Index, less its low fees. It's focused on U.S. stocks from the FTSE Global Equity Index Series that have high yields (excluding REITs), and its recent top holdings included Broadcom, JPMorgan Chase, and ExxonMobil.
iShares Core Dividend Growth ETF
This ETF holds stakes in companies that not only pay meaningful dividends, but that also have track records of increasing their payouts. Dividend growers can be particularly powerful portfolio boosters, and this ETF's top holdings recently were Apple, Microsoft, and ExxonMobil.
Vanguard S&P 500 ETF
Finally, here's a bonus dividend-paying ETF. This S&P 500 index fund's yield isn't huge, but it makes up for that with a solid track record of growth. The returns in the table above show how it has generally compared to the others being recommended, but don't expect such high returns in the future. The long-term average annual gain of the stock market is closer to 10% than 15%. Investing in the S&P 500 can get you a measure of passive income from dividends along with stock-price appreciation.
There are plenty of other solid ETFs to investigate, many with meaningful dividend yields. There are also lots of ETFs and stocks with fatter dividend yields, though they may offer lower historical returns and/or more risk, as well. So dig into some or all of these or some others, and you should be able to set yourself up to collect lots of passive income.
