5 High-Yield Dividend ETFs to Buy to Generate Passive Income – The Motley Fool

Who doesn’t want passive income? By definition, passive income is hard-earned cash. You don’t have to work, inherit money from a wealthy relative, or rob a bank to get this money.

There are many sources of passive income, but not all of them will appeal to everyone. For example, you can buy real estate and rent it out, but that requires some effort and real estate knowledge. You can also buy a fixed annuity, which gives you monthly payments, but you usually have to pay a large amount of money into the annuity first.

5 Attractive High Dividend ETFs

That’s where dividend exchange-traded funds (ETFs) come in. ETFs operate much like mutual funds, but trade like stocks, and some boast stable dividend yields while also offering the potential for growth. Here are five ETFs worth taking a closer look at, plus bonuses.

Source: Morningstar.com, as of June 24, 2024.

*Vanguard does not provide SEC yields, this is the ETF’s most recent “unadjusted effective yield.”

If the above table doesn’t seem very interesting, the following table may be of help: Let’s say you have, or will retire with, a $500,000 portfolio. This portfolio has an overall average dividend yield of 3.5%. This is enough to generate $17,500 in passive income each year. If you currently earn $80,000 per year, this is the equivalent of receiving an additional 22% bonus each year.

Now that we hope you are more interested in these ETFs, let’s take a quick look at each one.

iShares Preferred and Income Securities ETF

This ETF focuses on preferred stocks, not common stocks, which is what most people typically invest in. You can’t expect preferred stocks to appreciate in value or to pay significantly higher dividends. Preferred stocks often pay fixed dividends, but they often have very high yields.

Schwab US Dividend ETF

This index fund tracks the Dow Jones US Dividend 100 Index, which is made up of high-yield US stocks that have consistently paid dividends. The largest recent holdings are: Texas Instruments, Amgenand Lockheed Martin.

Vanguard Real Estate ETF

Real estate investment trusts (REITs) own lots of properties and earn income by renting them out. Owning actual real estate can be difficult and expensive, so if you want to make money from real estate, consider investing in an ETF like this one instead. Owning REITs can be thought of as a “very lazy way to be a landlord.” Recent top holdings in this ETF include: Prologis, American Towerand EquinixEach specializes in warehouses, communication towers, digital infrastructure, etc.

Vanguard High Dividend Yield ETF

This ETF seeks to replicate the returns of the FTSE High Dividend Yield Index, minus the low fees. It focuses on high-yielding US stocks (excluding REITs) in the FTSE Global Equity Index Series, and recent major holdings include: Broadcom, JPMorgan Chaseand ExxonMobil.

iShares Core Dividend Growth ETF

This ETF holds stocks in companies that not only pay meaningful dividends but also have a track record of growing those dividends. Dividend growth companies can be particularly strong portfolio drivers, and some of the ETF’s recent top holdings include: apple, MicrosoftExxonMobil.

Vanguard S&P 500 ETF

Finally, we have a bonus dividend ETF. This S&P 500 index fund doesn’t offer a huge yield, but it makes up for it with a solid growth track record. The returns in the table above show how it compares to other recommended funds, but don’t expect such high returns in the future. The long-term average annual return of the stock market is 10%, not 15%. Investing in the S&P 500 allows you to earn a constant passive income from dividends as stock prices rise.

There are plenty of other solid ETFs to look into, many of which offer substantial dividend yields. There are also plenty of ETFs and stocks that offer high dividend yields, but they may have lower historical returns and be more risky. So, taking a closer look at some or all of these ETFs and stocks, or other ETFs, could help you make a lot of passive income.