As you try to optimize your financial life, it's smart to seek passive income -- streams of money that flow to you, requiring little or no effort on your part. Sources of passive income include annuities, interest from savings accounts, and/or rent checks for properties you own and lease out.
A particularly wonderful kind of passive income is from dividends, and one of the easiest and most effective ways to invest in dividend-paying stocks is via dividend-focused exchange-traded funds (ETFs). I'll soon delve into several solid ones.
Why dividends?
First, here's a refresher on why you might want to favor dividends for your long-term portfolio. Check out the table below and see if it surprises you:
|
Dividend-Paying Status |
Average Annual Total Return, 1973-2024 |
|---|---|
|
Dividend growers and initiators |
10.24% |
|
Dividend payers |
9.20% |
|
No change in dividend policy |
6.75% |
|
Dividend non-payers |
4.31% |
|
Dividend shrinkers and eliminators |
(0.89%) |
|
Equal-weighted S&P 500 index |
7.65% |
Data source: Ned Davis Research and Hartford Funds.
Here are some more wonderful things about dividends:
- Healthy and growing dividend-paying stocks tend to increase their payouts over time, helping you keep up with inflation.
- Such dividend payers will likely have stock prices that increase over time, too, despite occasional stock market pullbacks. So you can benefit from stock-price growth, dividend income, and dividend growth. It's a win-win-win!
- Also, dividends can be powerful when there are a lot of them. Imagine, for example, having $400,000 invested in dividend-paying stocks with an overall average dividend yield of 3%. That's enough to generate around $12,000 in annual income -- about $1,000 per month. And that sum should grow over time, too.
- Dividend payers can provide income without requiring you to sell off part of your portfolio. Your account will just keep receiving regular infusions of cash.
- While retirees can use dividend income for living expenses, pre-retirees can reinvest those dividends in additional shares of stock -- which may then start delivering dividend payments of their own. Dividends are not just for our grandparents!
12 attractive dividend-paying ETFs
There are plenty of solid income-producing ETFs out there. Below are 12 worth considering, ranked by dividend yield. Among them is a simple S&P 500 index fund (which features a low dividend yield but a great track record of growth) and an ETF focused on preferred stocks (which features a high yield but little stock-price appreciation).
|
ETF |
Recent Yield |
5-Year Avg. Annual Return |
10-Year Avg. Annual Return |
15-Year Avg. Annual Return |
|---|---|---|---|---|
|
iShares Preferred & Income Securities ETF (PFF) |
6.37% |
2.05% |
3.61% |
4.52% |
|
State Street SPDR Portfolio S&P 500 High Dividend ETF (SPYD) |
4.53% |
10.37% |
9.68% |
N/A |
|
Vanguard Real Estate ETF (VNQ) |
3.92% |
5.28% |
5.53% |
7.41% |
|
Schwab U.S. Dividend Equity ETF (SCHD) |
3.82% |
9.13% |
12.49% |
N/A |
|
Vanguard International High Dividend Yield Index Fund ETF (VYMI) |
3.69% |
12.26% |
N/A |
N/A |
|
Vanguard Energy Index ETF (VDE) |
3.11% |
22.41% |
9.15% |
4.91% |
|
Fidelity High Dividend ETF (FDVV) |
2.89% |
15.34% |
N/A |
N/A |
|
Vanguard High Dividend Yield ETF (VYM) |
2.44% |
12.51% |
12.14% |
12.00% |
|
iShares Core Dividend Growth ETF (DGRO) |
2.09% |
11.67% |
13.92% |
N/A |
|
Vanguard Total World Stock ETF (VT) |
1.83% |
10.74% |
12.72% |
10.06% |
|
Vanguard Dividend Appreciation ETF (VIG) |
1.62% |
11.37% |
13.85% |
12.37% |
|
Vanguard S&P 500 ETF (VOO) |
1.13% |
14.92% |
15.61% |
14.02% |
Data source: Morningstar.com, as of Jan. 8, 2026.
You can see that, in general, there's a trade-off between yield and growth, though a few of the ETFs -- such as the State Street SPDR Portfolio S&P 500 High Dividend ETF and the Schwab U.S. Dividend Equity ETF -- do a good job of offering both.
Here are a few more thoughts as you peruse the table:
- First, remember that you can always opt to spread your dollars across several of the ETFs above.
- The S&P 500 index fund is primarily used for comparison purposes, but it does offer a dividend, albeit a modest one, and its payout will likely increase over time as well. And it parks you in much of the U.S. economy.
- The Vanguard Total World Stock ETF will have you invested in most of the entire world's stock markets -- while offering a solid dividend yield, too.
- If you're bullish on the energy sector because you're aware that the rapid growth of data centers for artificial intelligence (AI) processing demands a lot of energy, perhaps consider the Vanguard Energy ETF, above.
- If you're bullish on real estate, consider the Vanguard Real Estate ETF. It's full of real estate investment trusts (REITs) that focus on various niches, including apartments, retail spaces, warehouses, medical facilities, hotels, and even data centers, among many others.
So consider any or all of these income-producing ETFs, and enjoy the passive income they provide.
