Passive income means earning money without doing any work. While it's true that the income comes from outside of your working wages, you have to do your homework to ensure you choose the right investments that align with your goals.
Exchange-traded funds (ETFs) are one way to go about it. You can pick ETFs that generate income while aligning with your risk and return objectives. Equity ETFs invest in stocks, providing diversification like a mutual fund. However, they also provide liquidity since they trade like equities throughout the day.
While it's a vast universe, these three ETFs should fit the bill for investors seeking passive income.
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1. Schwab U.S. Dividend Equity ETF
The Schwab U.S. Dividend Equity ETF (SCHD +1.97%) invests passively, tracking the Dow Jones U.S. Dividend 100 Index. Since it's an index fund, it's able to keep costs down, and it has a low 0.06% expense ratio. That means investors aren't paying large costs that reduce returns.
The underlying index consists of high-dividend-yield U.S. stocks that have a history of payments and financial strength. The ETF has the highest weighting in the financial sector, 18.2%, followed by healthcare's 15.8%, consumer staples' 14%, industrials' 13.5%, and energy's 11.9%.
Individual stock holdings each have less than a 5% weight. Money management firm BlackRock has a 4.7% weighting. Cisco Systems, Home Depot, Bristol Myers Squibb, and Chevron each have more than a 4% weight in the ETF.
The Schwab U.S. Dividend Equity ETF has a 3.6% yield. In comparison, the S&P 500 yields 1.2%.
2. Vanguard High Dividend Yield ETF
The Vanguard High Dividend Yield ETF (VYM +1.74%) is another passive fund. This ETF seeks to track the FTSE High Dividend Yield Index, and hence, has a low 0.06% expense ratio.
As the name suggests, the index includes over 500 high-dividend-yielding stocks. Financial stocks make up the largest portion, nearly 22% of the portfolio. Industrials (12.7%), healthcare (11.7%), consumer staples (10.8%), and consumer discretionary (10.1%) are the next largest sector weightings.
Broadcom is the largest stock holding with a 4.4% weight. JPMorgan Chase has a 3.6% weighting, and ExxonMobil rounds out the top three with slightly less than a 3% weight.
The Vanguard High Dividend Yield ETF had about a 2.5% yield at the end of November.
3. Wisdom Tree U.S. Small Cap Dividend Fund
The Wisdom Tree U.S. Small Cap Dividend Fund (DES +1.07%) offers investors another opportunity to invest in an index. This ETF looks to follow the results of the Wisdom Tree U.S. SmallCap Dividend Index.
Despite the fund's name, it has 62% invested in mid-capitalization stocks, or those between a $2 billion and $10 billion market capitalization. The ETF has the balance placed in small-cap stocks.
While many small-capitalization stocks don't pay dividends since many of these companies invest for growth, the index provides access to the universe that makes payouts. Hence, you can invest in smaller stocks and still receive dividends. As the name suggests, the ETF invests in U.S. stocks.
Financials have the largest weight, 29.2%. Industrial and consumer discretionary stocks have 14.5% and 11.8% weights, respectively.
Wisdom Tree U.S. Small Cap Dividend Fund has a 2.7% yield.
