Exchange-traded funds (ETFs) make investing easy. These managed funds come with built-in diversification. Because of that, you can buy an ETF and sit back and let it do all the work.
Many ETFs hold income-generating investments, making them ideal for those seeking passive income. Here are four top dividend ETFs yielding at least 4% to buy and hold for easy passive income.
Image source: Getty Images.
Schwab U.S. Dividend Equity ETF
The Schwab U.S. Dividend Equity ETF (SCHD 0.10%) tracks an index (Dow Jones U.S. Dividend 100 Index) focused on companies that pay quality and sustainable dividends. It targets higher-yielding dividend stocks that have grown their payouts at healthy rates over the past five years, which seem likely to continue.
The Schwab U.S. Dividend Equity ETF has a distribution yield of slightly more than 4% based on its payments over the last 12 months. Given the fund's emphasis on holding dividend growers, it has delivered a steadily rising income stream to its investors over the years:
SCHD Dividend data by YCharts.
While that past performance doesn't guarantee future success, the fund's focus on high-quality companies that grow their dividends bodes well for its ability to continue paying a steadily rising income stream.
iShares Preferred and Income Securities ETF
The iShares Preferred and Income Securities ETF (PFF +0.84%) tracks an index that holds preferred and hybrid securities. These investments are like a combination of bonds (they pay fixed income) and stocks (they represent an ownership interest). They tend to be riskier than bonds but have a lower risk profile than stocks.
The fund currently holds 443 securities, primarily issued by financial institutions (70.2% of its holdings), industrial companies (18.2%), and utilities (10.2%). The ETF has a 6.6% yield based on payments over the last 12 months. That's on par with a high-yield bond fund. In addition to that high yield, which can fluctuate from month to month, the fund offers some potential for price appreciation. For example, a $10,000 investment made at the fund's inception in 2007 would be worth over $20,000 today.
JPMorgan Equity Premium Income ETF
The JPMorgan Equity Premium ETF (JEPI 0.04%) aims to distribute income to investors each month while also providing them with less volatile exposure to the equity market. The JPMorgan Equity Premium ETF has a two-fold investment strategy designed to achieve that goal:
- Defensive equity portfolio: The fund holds a portfolio of stocks selected based on its proprietary, risk-adjusted stock rankings to provide exposure to the market.
- Discipline options overlay strategy: The ETF's managers write out-of-the-money (above the current level) call options on the S&P 500 Index. By writing (or shorting) these options, it gets paid the options premium (value of the option). The strategy generates income that the fund can distribute to investors each month.
The fund's strategy is very lucrative:
Image source: JPMorgan.
As that chart shows, it has delivered a higher income yield than U.S. high-yield bonds (junk bonds) over the past 12 months. In addition to that lucrative passive-income stream, the fund can also deliver some price-appreciation potential from its stock portfolio.
Pacer Global Cash Cows Dividend ETF
The Pacer Global Cash Cows Dividend ETF (GCOW 0.45%) focuses on companies that generate lots of free cash flow. That enables these cash cows to pay lucrative dividends. The strategy-driven ETF aims to identify companies that can continue to pay attractive dividends by screening for them based on their free-cash-flow yield and dividend yield.
The fund holds the top 100 companies with the highest free-cash-flow yield and highest dividend yield. It weighs them by their dividends, capping the top holding at 2% of the fund's assets. It reconstitutes and rebalances its holdings twice each year to ensure it holds the 100 top cash cow dividend stocks.
The average holding in the fund has a 6.3% free-cash-flow yield and a 4.7% dividend yield. However, after expenses (the fund has a 0.6% ETF expense ratio), its annualized dividend yield is closer to 4.2%. While the fund's strategy aims to identify companies in a better position to maintain and grow their dividends, there's no guarantee that will happen, as fund payments can fluctuate, sometimes significantly, based on dividends received by the companies it holds.
Easy ways to collect passive income
ETFs make it super easy to generate passive income. Many ETFs focus on holding income-producing investments, giving investors lots of options. The Schwab U.S. Dividend Equity ETF, iShares Preferred and Income Securities ETF, JPMorgan Equity Premium Income ETF, and Pacer Global Cash Cows Dividend ETF stand out for their attractive yields and potential for income growth.
