3 High-Yield Dividend ETFs to Buy to Generate Passive Income
There are many ways to generate passive income these days. Investing in exchange-traded funds (ETFs) might be the most passive way to produce passive income. You don't have to manage them like a portfolio of stocks or rental property. Because of that, you can simply sit back and collect the income.
SPDR Portfolio S&P 500 High Dividend ETF (NYSEMKT: SPYD), JPMorgan Equity Premium Income ETF (NYSEMKT: JEPI), and SPDR Portfolio High Yield Bond ETF (NYSEMKT: SPHY) are great high-yield dividend ETFs for those seeking passive income. Here's why income-seeking investors should take a closer look at these ETFs.
Focused on the top high-yield dividend stocks
The SPDR Portfolio S&P 500 High Dividend ETF holds 80 of the top high-yielding dividend stocks in the S&P 500 index. So, it provides investors with an instantly diversified portfolio of income stocks. The fund has the following sector allocations:
Real estate: 24.2%
Utilities: 17.9%
Financials: 16.2%
Consumer Staples: 11.9%
Healthcare: 7.6%
Materials: 6.3%
Energy: 4.9%
Communications: 3.8%
Consumer discretionary: 3.4%
Industrials: 2.6%
Information technology: 1.3%
The fund also has a very balanced allocation across its top holdings. Its largest position (Kellanova) has a 1.6% weighting, while its top 10 holdings comprise less than 14% of the fund's assets.
The fund currently has a dividend yield of around 4.3%, much higher than the S&P 500's (recently around 1.4%). For perspective, every $1,000 invested in this ETF would produce about $43 of passive income each year at that rate, compared to around $14 in an S&P 500 index fund.
The SPDR Portfolio S&P 500 High Dividend ETF makes quarterly distribution payments, which fluctuate based on the dividends paid by companies in the fund. Meanwhile, the fund has a low ETF expense ratio of 0.07%, enabling investors to keep more of the income the holdings generate. Overall, this ETF is best for investors who want to generate dividend income and upside potential from owning shares of high-quality companies that should grow their earnings and dividend payments.
Income from options premiums
The JPMorgan Equity Premium Income ETF aims to deliver monthly distributable income and equity market exposure with less volatility. It has a two-fold strategy to achieve its bold target:
Defensive equity portfolio: The fund holds a portfolio of high-quality stocks selected based on fundamental research and its proprietary risk-adjusted stock ratings. It has over 100 holdings across various sectors.
Disciplined options overlay: The ETF sells out-of-the-money S&P 500 Index call options to generate income to distribute to investors each month.
Writing call options can be a lucrative passive income strategy. This fund has provided a 7.6% rolling dividend yield over the past 12 months and a 6.9% annualized yield based on its payments over the last 30 days. That income yield is on par with what investors could earn from high-yield junk bonds (7.9%). However, options income can be volatile (premiums tend to rise during periods of volatility), causing the monthly distribution payments to vary.
This fund enables investors to earn income that rivals high-yield bonds, with additional upside potential from its equity portfolio. That makes it ideal for those seeking a lucrative monthly income stream and equity upside potential with less volatility than the broader market. However, investors pay a higher fee for owning this ETF at 0.35%.
One person's junk is another's passive income stream
The SPDR Portfolio High Yield Bond ETF focuses on junk bonds, or those with sub-investment-grade credit ratings. High-yield bonds tend to be at higher risk of defaulting than investment-grade bonds. Because of that, they offer a higher income yield.
This ETF helps mute some default risk by holding over 1,900 bonds. It also offers additional diversification across sectors and issuers.
The fund offered a 7.7% yield based on its payments over the past 30 days. It distributes income each month, which varies based on the interest income paid by the bonds in its portfolio. The fund has a very low expense ratio (0.05%), enabling investors to keep most of the income the junk bonds produce.
This ETF is best for investors who seek a reasonably fixed income stream and are comfortable with the higher risks associated with junk bonds.
Three great ways to generate passive income
the SPDR Portfolio S&P 500 High Dividend ETF, JPMorgan Equity Premium Income ETF, and SPDR Portfolio High Yield Bond ETF offer high dividend yields. That enables investors to generate more income for every dollar they invest. Add in their diversification benefits, and these ETFs are great options for those who want to sit back and start collecting passive income.
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Matt DiLallo has positions in JPMorgan Equity Premium Income ETF and SPDR Series Trust-SPDR Portfolio High Yield Bond ETF. The Motley Fool recommends Kellanova. The Motley Fool has a disclosure policy.
3 High-Yield Dividend ETFs to Buy to Generate Passive Income was originally published by The Motley Fool