Even if you've only been investing a short time, you've likely learned the importance of spreading out your risk by diversifying your portfolio. Diversification comes in a variety of flavors, from gaining exposure to different sectors to buying stocks that have varying market capitalizations.
Income investors, in particular, can benefit from diversifying their sources of passive income with exchange-traded funds (ETFs) that pay out more than the benchmark S&P 500's current yield around 1.2%. There are a variety of choices out there, but the Energy Select Sector SPDR Fund (XLE 0.68%) iShares Select Dividend ETF (DVY 0.67%), and the Vanguard Utilities ETF (VPU 0.36%) are all at the top of the heap for best ETF opportunities to generate strong passive income.
NYSEMKT: XLE
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Power your passive income streams with the Energy Select Sector SPDR Fund
For those eager to generate passive income and gain exposure to leading businesses in the energy sector, the Energy Select Sector SPDR Fund is a great choice. Mitigating the risk of investing in an individual energy stock, the fund attempts to offer investors a thorough representation of industry-leading oil and gas businesses to those that specialize in energy equipment and services, and consumable fuel businesses. Currently, it has a yield of 3% as well as a low expense ratio of 0.08%, so investors won't lose a significant portion of their dividends to fees.
Of the 22 holdings in the ETF, oil supermajors ExxonMobil, Chevron, and ConocoPhillips represent the top three positions, with a combined weighting of about 38%. Pipeline stocks also figure prominently in the Energy Select Sector SPDR Fund: Williams Cos. and ONEOK represent the fourth- and sixth-largest positions.
NASDAQ: DVY
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Gain exposure to a broad swath of industries with the iShares Select Dividend ETF
Investors who are committed to reducing the risks associated with a downturn in a particular stock market sector will find the iShares Select Dividend ETF particularly appealing. The fund, which currently has 98 holdings, is made up of U.S. stocks with a five-year history of paying dividends. Including stocks from a wide swatch of industries, the ETF also has stocks that represent varying market caps. The ETF has a yield of 3.6% and a moderate expense ratio of 0.38%.
Utilities and financials stocks make up the most sizable positions -- 29% and 28%, respectively -- in the iShares Select Dividend ETF; however, tobacco stocks Altria Group, the top holding in the fund, and Philip Morris International, the third-largest position, actually represent the largest positions.
While the fund prioritizes stocks that have records of paying dividends for five years, it's worth noting that the ETF includes tickers that have impressive streaks of hiking their payouts for decades. Altria, for example, has boosted its dividend every year for more than five decades, which makes it a Dividend King, while Chevron has paid an increasingly higher dividend for 37 years.
NYSEMKT: VPU
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Put the Vanguard Utilities ETF to work, without having to pay an arm and a leg in fees
Oftentimes, investors looking to supplement their passive income streams with conservative options will turn to utility stocks since they generate dependable cash flows. The Vanguard Utilities ETF, therefore, is a great candidate for those less concerned with growth and more focused on dependability. With the stated goal to "track the performance of a benchmark index that measures the investment return of stocks in the utilities sector," the Vanguard Utilities ETF includes a variety of utilities including electricity, water, gas, and independent power producers.
Renewable energy stalwarts NextEra Energy and Constellation Energy represent the top two positions in the fund with weightings of 11.2% and 7.2%, respectively. Southern Co., with a 7% weighting, and Duke Energy, with a 6.6% weighting, follow closely behind, rounding out the four largest positions.
The Vanguard Utilities ETF has a yield of 2.9% and an extremely low expense ratio of 0.09%.
Is now the time to ramp up your passive income with these dividend ETFs?
Investors interested in the opportunities that sector ETFs afford should certainly dig deeper into the Energy Select Sector SPDR Fund and the Vanguard Utilities ETF -- both of which charge tiny management fees. On the other hand, those looking for exposure to a wider swath of industries will find the iShares Select Dividend ETF appealing.
