Are you aiming to create an income portfolio that requires minimal oversight? A selection of dividend-paying exchange-traded funds (ETFs) might just be the solution. You really don’t need an extensive collection—just a few quality options can do the trick. Let’s explore three key features that hold their own.
1. Establish a solid base: Schwab US Dividend Stock ETF
If you’re only able to include one income ETF in your portfolio, consider the Schwab US Dividend Stock ETF.
If you’ve been tracking the performance of various ETFs, you might notice this fund is a bit behind compared to the S&P 500 and the SPDR S&P 500 ETF Trust since the beginning of 2023, even considering dividend payments made in that period.
Don’t let that discourage you. This fund is designed to mirror the Dow Jones US Dividend 100™ Index, focusing on high-yielding stocks with solid fundamentals. While it doesn’t include heavyweights like Nvidia, Amazon, or Microsoft, which are dominating headlines lately, it’s clear that the stocks in this ETF are steadily increasing their dividends without much fuss.
But remember, nothing remains static forever. The economic environment that benefited the tech and growth sectors is shifting, which generally favors value stocks. Reliable income stocks are becoming increasingly appealing at a time when opportunities for capital gains seem scarce. Although SCHD offers a respectable dividend yield of around 3.3%, it’s worth noting that it may attract new entrants.
2. Beyond immediate yield: ProShares S&P 500 Dividend Aristocrats® ETF
While high dividend yields attract income investors, it’s crucial to look at the bigger picture, particularly if you’re investing for the long haul. This is where the ProShares S&P 500 Dividend Aristocrats ETF comes into play. (The term Dividend Aristocrats® is a trademark owned by Standard & Poor’s.)
This fund holds stocks from 69 companies that have raised their dividends annually for at least 25 years. This impressive history reflects strong operational resilience, which tends to hold up even during economic downturns.
It’s understandable if potential investors have some hesitation regarding its current yield of just over 2%. While it may not sound overly impressive, consider its growth—NOBL’s quarterly payouts have surged nearly 40% within the past five years and almost doubled in less than a decade. With this track record, it’s likely that investing in this ETF now could yield considerably more in the future, provided you’re willing to be patient.
NOBL’s current top stocks include West Pharmaceutical Services, Franklin Resources, and AbbVie.
3. A unique approach: Neos Nasdaq-100 High Income ETF
Finally, consider adding the Neos Nasdaq-100 High Income ETF to your longer-term investment strategy.
This fund is somewhat distinctive—centered around the Nasdaq-100, known for not being the best source for dividends. Yet, QQQI is generating income through a strategy called “covered calls,” a method of buying stocks while also selling options on those stocks. This approach yields ordinary income, shared with shareholders.
And yes, the annualized yield for this fund stands at an attractive 14%.
Now, it might sound too good, but there are some nuances. Typically, this fund may lag behind the Nasdaq 100 during market upswings since selling covered calls means parting with some shares when you would otherwise prefer to hold them. However, this buy-write approach tends to weather recessions and flat markets fairly well due to its focus on growth stocks.
It’s important to note that while this ETF can generate considerable income, its dividend payments may not be entirely stable—another common aspect of buy-write strategies. So, it might not be the ideal first or second investment in your income portfolio but could work well as a third or fourth source of revenue.
