I'm on a mission to produce more passive income. My strategy is to grow my passive income so that it can cover my basic living expenses. That would enable me to become financially independent and relieve the stress of needing to work to pay the bills.
One aspect of my plan is investing in exchange-traded funds (ETFs) with strategies focused on generating income. Three of my favorites are Schwab U.S. Dividend Equity ETF (SCHD 1.23%), JPMorgan Nasdaq Equity Premium Income ETF (JEPQ +0.19%), and Vanguard Total Bond Market ETF (BND 0.15%). Here's why I plan to buy more of these top income-producing ETFs this May.
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100 top dividend stocks in one fund
The Schwab U.S. Dividend Equity ETF is a passively managed fund that tracks an index focused on companies that pay quality and sustainable dividends (Dow Jones U.S. 100 Index). The index's manager screens companies based on several quality characteristics, including dividend yield, dividend growth, and balance sheet strength. As a result, this ETF holds 100 high-quality, higher-yielding dividend stocks.
The fund currently has a dividend yield of around 4%. That's more than double the S&P 500's (^GSPC 0.11%) dividend yield (currently less than 1.5%). Because of that, the ETF enables me to generate more passive income from each dollar I invest (every $100 invested would produce about $4 in annual passive income).
Dividend growth is also important for this fund. As a result, it has steadily paid out higher distributions to investors:
SCHD Dividend data by YCharts
That high-yielding income stream should continue rising in the future. This means the ETF can supply me with an above-average and growing stream of dividend income.
A premium passive income stream
The JPMorgan Nasdaq Equity Income ETF has a two-pronged investment strategy. It aims to distribute income to investors each month. The fund also seeks to provide equity upside exposure to the Nasdaq-100 index.
The fund generates distributable income from its disciplined options overlay strategy. It writes (shorts) out-of-the-money (above the market price) call options on the Nasdaq-100 index. As a result, the fund gets paid the options premium (value of the option), which provides it with income to distribute to investors.
That income stream has been very lucrative over the past year:
Data source: JPMorgan Asset Management.
In addition to options premium income, the fund also offers equity exposure to the Nasdaq-100 index. However, instead of passively tracking that index, the fund's managers use an applied data science approach to fundamental research to construct a portfolio based on stocks in that index. This strategy can help the fund outperform that index.
This ETF provides me with a lucrative monthly income stream (though it does fluctuate) and high price appreciation potential.
An easy way to invest in bonds
The Vanguard Total Bond Market ETF provides fairly broad exposure to the bond market. It holds investment-grade bonds issued by the U.S. government and dollar-denominated bonds issued by corporations and foreign governments. The fund doesn't invest in inflation-protected, tax-exempt, or junk bonds. This investment strategy enables the ETF to provide investors with a relatively stable fixed-income stream.
The majority of its holdings are U.S. government bonds (68.5%), while the remainder are AAA- (3.3%), AA- (3.2%), A- (11.9%), and BBB- (13.1%) rated bonds. Its government bond holdings include U.S. Treasuries and bonds issued by other government agencies, like the Federal Home Loan Mortgage Corporation, known as Freddie Mac.
The fund's more than 11,375 bonds have an average yield to maturity of 4.6% and average effective maturity of 8.2 years. The fund distributes interest income monthly and has a current yield of 4.4%.
This ETF helps diversify my portfolio by adding exposure to the bond market, which helps reduce risk while also providing me with some passive income.
A great trio of income-generating ETFs
I've found that investing in ETFs can be a great way to bolster my passive income. These three funds, in particular, generate income from different sources, which helps diversify my income portfolio. That helps reduce risk, increasing the likelihood that I'll eventually reach my goal of becoming financially independent through passive income.
