Buying exchange-traded funds (ETFs) is an easy way to generate passive income. They require minimal active management, making them truly passive investments.
Schwab U.S Dividend Equity ETF(NYSEMKT: SCHD) passively tracks an index (Dow Jones U.S. Dividend 100 Index) that measures the performance of 100 top high-yielding dividend stocks. That index screens stocks based on four dividend-quality characteristics, including dividend yield and five-year growth rate.
The Schwab U.S. Dividend Equity ETF reconstitutes its holdings once a year, adding the highest-quality dividend stocks and jettisoning lower-quality holdings. At its last update this past March, the fund’s 100 holdings had an average yield of 3.8% and had grown their payouts by an 8.3% annual pace over the past five years. The highest-quality dividend stocks have the largest weighting in the fund. (Its top current holding has a 4.4% weighting.)
This ETF’s focus on tracking an index that screens stocks for both yield and growth enables it to deliver an attractive, steadily rising income stream. It currently yields 3.8%. For perspective, investors can generate $3.80 in passive income for every $100 invested at that rate.
Meanwhile, thanks to the underlying dividend growth of its holdings, the ETF has increased its income payments to investors by more than 500% since its formation in 2011. The passively managed fund charges investors a very low ETF expense ratio of 0.06%, enabling them to keep more of the dividend income generated by its holdings.
Pacer Global Cash Cows Dividend ETF(NYSEMKT: GCOW) is a strategy-driven ETF. It aims to provide investors with a steady stream of income and capital appreciation by screening for companies with high free-cash-flow yields and high dividend yields.
It starts with the 1,000 largest companies, whittles that list down to the 300 stocks with the highest free-cash-flow yield, and further narrows it to the 100 highest by dividend yield. The fund holds the remaining 100 companies, weighted by dividend yield, with the top holding capped at 2% of its assets.
Those holdings currently have an average free-cash-flow yield of 6.2% and a dividend yield of 4.7%. However, the fund’s income yield to investors is closer to 4% due to its higher ETF expense ratio (0.6%). In exchange for that higher cost, the actively managed fund offers the potential to provide investors with more income and capital gains than a passively managed fund.
SPDR Portfolio S&P 500 High Dividend ETF(NYSEMKT: SPYD) is a passively managed dividend ETF. It tracks the performance of the S&P 500 High Dividend Index, which selects 80 of the highest-yielding companies from the S&P 500 and holds these stocks in equal weightings. This passively managed fund also has a low ETF expense ratio (0.07%).
The 80 companies held by the fund have an average dividend yield of 4.5%. Given the underlying index that the SPDR Portfolio S&P 500 High Dividend ETF tracks, which focuses on yield above all else, the fund delivers lower dividend growth. Since its inception in 2015, the fund’s payment has risen by less than 50%. The fund’s investment strategy makes it ideal for those seeking a high income yield above all else.
Vanguard Real Estate ETF(NYSEMKT: VNQ) invests in companies that own commercial real estate, such as office buildings, apartment complexes, and industrial facilities. Most of its holdings are real estate investment trusts (REITs). These entities must distribute 90% of their taxable income to investors through dividends, making them ideal passive-income investments.
Buying the Vanguard Real Estate ETF is one of the simplest ways to make passive income from real estate. The passively managed fund currently holds over 150 real estate stocks, with the largest REITs having the highest allocations in the fund (its top holding is 6.6% of its assets).
As a result, it provides investors with broad exposure to the REIT sector, led by the largest companies. The fund charges investors a reasonable 0.13% expense ratio for the ease of generating passive income from the real estate sector (3.6% current yield).
Each of these ETFs offers distinct advantages. SCHD balances yield and growth; GCOW prioritizes both income and capital gains with a higher expense ratio; SPYD focuses on maximizing dividend yield from the S&P 500 at the cost of slower growth; and VNQ uniquely targets the real estate sector for income. You can choose an ETF based on your income goals and growth preference or combine them for broader diversification.
Before you buy stock in Schwab U.S. Dividend Equity ETF, consider this:
The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Schwab U.S. Dividend Equity ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.
Consider when Netflix made this list on December 17, 2004… if you invested $1,000 at the time of our recommendation, you’d have $590,357!* Or when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $1,141,748!*
Now, it’s worth noting Stock Advisor’s total average return is 1,033% — a market-crushing outperformance compared to 193% for the S&P 500. Don’t miss the latest top 10 list, available with Stock Advisor, and join an investing community built by individual investors for individual investors.
Matt DiLallo has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool has positions in and recommends Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.
