Not every investor is looking to chase the next big growth stock. In fact, some investors are more concerned about finding investments that can generate solid passive income.
These types of investments are particularly attractive the older you get, as they can provide a steady stream of income in retirement without you having to sell off any of your holdings. Before you get to that point, though, you can still dollar-cost-average into positions and reinvest the dividends to build them up over time.
While you can certainly find attractive dividend-paying stocks on your own, you do need to be wary of running into value traps with high yields that could be unsustainable and eventually cut. That is why investing in high-yield dividend exchange-traded funds (ETFs) may be a better option. Let's look at two high-yield ETFs you can add to your portfolio today.
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1. Schwab U.S. Dividend Equity ETF
One great option for income-oriented investors is the Schwab U.S. Dividend Equity ETF (SCHD +1.80%). The ETF has a solid long-term track record and currently sports a yield of 3.9%. It also carries a low expense ratio of just 0.06%.
NYSEMKT: SCHD
Key Data Points
The ETF tracks the Dow Jones U.S. Dividend 100 Index, which was specifically designed to avoid high-yield value traps. The index has a stringent set of criteria that looks well beyond just a stock's yield to be included. To be added in the index, Dow Jones looks at several metrics, including a company's free cash flow to total debt ratio, return on equity (ROE), forward dividend yield, and five-year dividend growth rate. This helps ensure that you are getting stocks of companies with solid balance sheets and that generate strong cash flow, which can help sustain continued dividend growth.
The index is reconstituted once a year, helping make sure that companies meet its standards. Last year, the index added 20 new stocks, while removing 17 current holdings. This included exiting some larger positions, including Pfizer, which added some significant debt after it acquired Seagen.
The Schwab U.S. Dividend Equity ETF has been a solid performer over the years, generating a 12.2% average annual return since its inception in October 2011.
2. The Alerian MLP ETF
For investors looking for a higher yield, the Alerian MLP ETF (AMLP +0.45%) is a great option. The ETF mirrors the performance of the Alerian MLP Infrastructure Index, which invests in midstream master limited partnerships (MLPs).
The ETF currently carries a robust 8.8% yield, making it an attractive option for income-oriented investors. Another reason investors are drawn to the ETF is that it lets investors avoid the K-1 forms that come with investing in individual MLPs. But because of this, it does carry a higher expense ratio of 0.85%.
NYSEMKT: AMLP
Key Data Points
I think now is actually an ideal time to invest in the Alerian MLP ETF. The pipeline stocks that make up the bulk of the index largely act as toll roads, with very little exposure to energy prices, and their primarily fee-based models create solid cash flow visibility. At the same time, midstream MLPs have greatly lowered their leverage and improved their balance sheets over the past several years. Meanwhile, many are seeing some great growth prospects given the increasing demand for natural gas coming from the artificial intelligence (AI) infrastructure buildout.
The ETF has been a strong performer over the past five years, with an average annual return of 28.8%. Despite that, the sector is trading at a huge discount to where the stocks traded before COVID-19. At the end of October, the sector had a forward enterprise value (EV) -to-EBITDA multiple of 8.6 times 2026 analyst estimates compared to the average 13.7 times multiple the group traded at between 2011 and 2016. That's a huge discount for a group of stocks that are arguably in much better shape today than a decade ago.
As such, I think this is a great entry point for investors looking to add some high-yield stocks to their portfolio. Also note that 90% of the stocks in the ETF also raised their distributions within the past year, so this is not just a stagnant yield play.
