With volatility spiking and stock market indexes like the S&P 500 (^GSPC 0.38%) and Nasdaq Composite (^IXIC 0.13%) down on the year, investors may be looking for ways to diversify their portfolios and collect some passive income.
Exchange-traded funds (ETFs) are one way to invest in dozens, if not hundreds or even thousands, of stocks under a single security. Many ETFs also pay dividends.
A couple of percentage points of annual dividend yield may not seem like much when stocks are reaching all-time highs. But dividends can be beneficial when equity prices are going down because they provide a return without the need to sell stocks.
Here's why these three Motley Fool contributors think the Schwab U.S. Dividend Equity ETF (SCHD 0.38%), the Vanguard Dividend Appreciation ETF (VIG 0.76%), and the Vanguard Total Corporate Bond ETF (VTC 0.40%) are worth buying now.
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The Schwab U.S. Dividend Equity ETF is a low-cost option for generating big passive income
Scott Levine (Schwab U.S. Dividend Equity ETF): Getting paid to do nothing -- like the opportunity available from investing in high-yield dividend ETFs -- is undeniably appealing. But the allure of the opportunity is considerably less enticing if you're losing dividend income to pay high management fees. Fortunately, the Schwab U.S. Dividend Equity ETF presents an option that is devoid of this pitfall. The fund currently provides a 30-day SEC yield of 3.7%, while featuring an extraordinarily low expense ratio of 0.06%.
The ETF's high yield is unsurprising. Its stated goal is to match the performance of the Dow Jones U.S. Dividend Index, which is designed to track the performances of fundamentally sound, high-dividend-yielding U.S. stocks with histories of consistent dividend payments. Unlike sector ETFs that concentrate on individual market sectors, the Schwab U.S. Dividend Equity ETF provides broad exposure to multiple sectors, thereby mitigating the risk of downturns in individual sectors. At the end of 2024, for example, financials had the largest weighting in the ETF with an 18.7% weighting, while healthcare had a 16.7% weighting, and consumer staples had a 14.4% weighting.
The ETF's five largest holdings illustrate its diverse industry exposure. Healthcare stalwarts AbbVie (ABBV 1.20%), Amgen (AMGN 0.61%), and Pfizer (PFE 0.21%) had weightings of 4.9%, 4.5%, and 4.2%, respectively. Consumer staples powerhouse Coca-Cola (KO 1.01%), meanwhile, had a 4.7% weighting, and investors obtain tech exposure with Cisco Systems (NASDAQ: CSCO), which had a 4.3% weighting.
The Schwab U.S. Dividend Equity ETF has $65.5 billion in net assets and makes quarterly distributions.
A balanced ETF with ultra-low fees
Daniel Foelber (Vanguard Dividend Appreciation ETF): The Vanguard Dividend Appreciation ETF targets companies that are growing their dividends, rather than those that sport high yields. In this vein, the fund includes more growth stocks than you'll find in yield-focused funds.
For example, Broadcom (AVGO 2.94%), Apple (AAPL 0.04%), Microsoft (MSFT +1.69%), Visa (V +0.86%), Mastercard (MA +1.86%), Costco Wholesale (COST +1.64%), and Walmart (WMT +0.09%) are all top 10 holdings. But all seven stocks have yields below the S&P 500 average of 1.3%. However, they are growing businesses with track records of boosting their payouts.
The fund also includes well-known stable stalwarts like UnitedHealth Group (UNH +0.67%), ExxonMobil (XOM 1.42%), Home Depot (HD 0.13%), Procter & Gamble (PG 1.24%), Johnson & Johnson (JNJ 0.98%), and Coca-Cola, to name a few.
With a balance between companies growing their payouts for decades and tech companies with shorter track records, the fund balances growth, value, and income.
The fund's 337 holdings round out to a yield of 1.7%. And with an expense ratio of just 0.05% and a minimum investment amount of just $1, the fund is an ultra-low-cost way for investors to achieve diversification, regardless of their portfolio size.
The Vanguard Dividend Appreciation ETF has a price-to-earnings (P/E) ratio of 25, which is a slight discount to the Vanguard S&P 500 ETF (VOO 0.31%) P/E ratio of 26.2.
All told, the Vanguard Dividend Appreciation ETF emphasizes value and income a little more than an S&P 500 index fund, making it a worthwhile choice for investors looking to boost their passive income while also investing in industry-leading growing businesses.
This ETF gives retail investors access to high-quality corporate bonds
Lee Samaha (Vanguard Total Corporate Bond ETF): Currently yielding 4.5%, the Vanguard Total Corporate Bond ETF is a great way to get relatively safe exposure to the investment-grade corporate bond market and a good income.
As the chart below shows, the ETF's performance mirrors that of market interest rates. That's perfectly logical because when the Treasury yield (seen as a risk-free investment) rises, it becomes less attractive to buy corporate bonds for their yield. The opposite is true when Treasury yields are falling, and the yield from corporate bonds becomes more appealing.
The Federal Reserve has been cutting its rates, and the two-year rate has recently dipped below the one-year rate. This indicates that the market thinks interest rates will be lower in two years than in one. Furthermore, the six-month rate is the highest of all four of these maturities -- a strong indication that the bond market thinks rates will fall. As such, the future direction of market rates looks more likely to be down than up from here.
10-Year Treasury Rate data by YCharts.
As for the Vanguard Total Corporate Bond ETF, you can sleep well knowing that all its bonds are BBB-rated (investment grade quality) or above, with 48% in BBB-rated bonds and 43.7% in AA-rated bonds. It's a safe way to generate income and benefit from a falling-rate environment.
