My top financial goal is to grow my passive income to the point where it will cover my basic living expenses. That would give me freedom from worrying about working to pay the bills.
One aspect of my strategy is to invest in exchange-traded funds (ETFs) with income-focused strategies. I try to add to my positions each month to boost my passive income from these funds. Three top ETFs that I can't wait to buy this July to increase my passive income are the Schwab U.S. Dividend Equity ETF (SCHD 2.09%), JPMorgan Nasdaq Equity Premium Income ETF (JEPQ -0.19%), and SPDR Portfolio High Yield Bond ETF (SPHY -0.14%). Here's why they are some of my favorite ETFs to buy for income.
Image source: Getty Images.
100 of the top dividend stocks in one fund
The Schwab U.S. Dividend Equity ETF tracks an index consisting of 100 top dividend-paying companies screened for the quality and sustainability of their dividends. These companies have higher-yielding dividends, healthy five-year dividend growth rates, and stronger financial profiles than their peers.
The ETF reconstitutes its holdings annually, replacing lower-quality dividend stocks with even higher-quality ones. At its last rebalance in March, its average holding had a 3.8% dividend yield and had grown its payout at an 8.4% annual rate over the past five years.
That combination of yield and growth is ideal for my passive income strategy. The fund will supply me with more income now compared to lower-yielding options. Meanwhile, the income stream should steadily rise as the fund's holdings increase their dividend payments:
SCHD Dividend data by YCharts
A premium income stream
The JPMorgan Nasdaq Equity Premium ETF has a dual mandate. It aims to provide investors with consistent monthly income and exposure to the Nasdaq-100 Index with less volatility.
The ETF generates income by writing (shorting) out-of-the-money call options -- meaning above the market price -- on the Nasdaq-100 Index. As an options writer, the fund gets paid the premium, or the value of the option. It distributes the income it earns from writing options to investors each month. That income stream can be very lucrative:
Image source: JPMorgan Asset Management.
As that chart shows, the fund's latest monthly payment put its income yield over 12%. Meanwhile, its payments over the past year give it a yield of more than 10%. That's much higher than the income yield of other asset classes, including U.S. high-yield bonds.
The fund also seeks to provide investors with equity market exposure. It holds an equity portfolio constructed by applying data science to fundamental research. That portfolio helps grow the fund's value, adding to its total return.
One person's junk is another's income treasure
Investing in bonds is a great way to diversify your portfolio, reduce risk, and generate passive income. I like to get exposure to the bond market by investing in ETFs. I own several bond ETFs, including the SPDR Portfolio High Yield Bond ETF. I like this fund because it provides broad exposure to non-investment-grade-rated bonds, or junk bonds, which have higher yields than investment-grade bonds. While these junk bonds have a higher risk profile than investment-grade bonds, this fund helps reduce risk by investing broadly in this asset class.
The ETF currently holds roughly 1,950 bonds from issuers across all industries. Its holdings also feature a range of credit ratings and maturities. The fund has an average maturity of 4.6 years and an average yield to maturity of 7.7%. That's a much higher income yield than investment-grade bonds, which are in the 4% to 5% range. I can generate more passive income by investing in this bond ETF. It's a small but growing piece of my bond portfolio.
Adding more income
The Schwab U.S. Dividend Equity ETF, JPMorgan Nasdaq Equity Premium Income ETF, and SPDR Portfolio High Yield Bond ETF are three of my favorite income ETFs. They all have attractive current yields, which enables me to generate more income from every dollar I invest. Thus, investing more money into these funds allows me to boost my passive income, putting me closer to reaching my financial freedom target. That's why I can't wait to buy even more shares of these top income ETFs in July.
