Exchange-traded funds (ETFs) are some of the most passive investments you can make. They can provide you with an instantly diversified portfolio of stocks. As a result, they can be excellent ways to generate passive income.
Here are three top dividend-focused ETFs to buy for passive income.
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Schwab U.S. Dividend Equity ETF
The Schwab U.S. Dividend Equity ETF (SCHD 0.03%) tracks an index (The Dow Jones U.S. Dividend 100 Index) designed to measure the performance of high-yielding stocks with a consistent record of paying dividends. It screens companies based on several dividend quality characteristics, including dividend yield and five-year dividend growth rate. In essence, the Schwab U.S. Dividend Equity ETF holds 100 of the highest quality, high-yielding dividend stocks.
The fund has a trailing 12-month dividend yield of 3.8%. Put another way, every $10,000 invested into this ETF would generate about $380 of annual passive income. The ETF also has a low expense ratio of 0.06%, enabling investors to keep more of the dividend income generated by its holdings.
NYSEMKT: SCHD
Key Data Points
A company's dividend yield is only part of the equation. The fund also focuses on companies with strong dividend growth track records. The fund's holdings have increased their dividend payments by an average of more than 8% annually over the past five years. As a result, the ETF's distribution payments tend to rise each year.
Vanguard Total Bond Market ETF
Investing in bonds is a great way to generate passive income. They typically make fixed interest payments twice a year.
NASDAQ: BND
Key Data Points
The Vanguard Total Bond Market ETF (BND 0.04%) makes it easy to invest in income-producing bonds. The fund aims to provide broad exposure to high-quality bonds issued by investment-grade-rated creditors. It currently holds over 11,400 bonds issued by government entities and corporations. This diversification helps further lower the risk of a credit default impacting your income.
The fund makes monthly income distributions to investors. It currently has an average yield to maturity of 4.3% with an average effective maturity of eight years. As a result, it should produce relatively steady income for years to come. This ETF also has an ultra-low expense ratio (0.03%). It's an ideal fund for investors seeking a very low-risk, relatively fixed-income stream.
JPMorgan Equity Premium Income ETF
The JPMorgan Equity Premium Income ETF (JEPI +0.17%) aims to provide investors with a monthly income stream and less volatile exposure to the equity market. This actively managed fund has a two-fold investment strategy:
- Defensive equity portfolio: It invests in stocks based on fundamental research and its proprietary risk-adjusted stock rankings.
- Disciplined options overlay strategy: The ETF writes out-of-the-money (above the current market price) call options on the S&P 500 Index to generate options premium income.
NYSEMKT: JEPI
Key Data Points
The fund's strategy of writing call options can be very lucrative. The JP Morgan Equity Premium Income ETF has provided investors with an income yield of more than 8% over the last 12 months. It makes monthly income distributions that rise and fall with the options income generated by its call-writing strategy.
Meanwhile, the fund's investment portfolio provides investors with exposure to the stock market, enhancing its total return potential. Since its inception in 2020, the fund has generated an average annual total return of 11.6%. The fund charges investors a reasonable 0.35% expense ratio for its active income-generation and portfolio management strategy.
Just sit back and watch the passive income flow into your account
If you're like most people, you probably have to work hard to earn money. Given that, it would be nice to see your money work hard for you. Investing some of it in ETFs like SCHD, BND, and JEPI lets you generate income from dividend-paying stocks, bonds, and options without doing any of the work. That passive income could eventually help offset some of your income from working so that you won't need to work as much in the future.
