Most of your income today is probably not passive. It’s probably your salary, for which you actively work hard. There’s a more appealing kind of income to strive for, though — passive income. Those are dollars that come floating to you, often regularly, without your having to do much.
One wonderful kind of passive income is dividend income: cash (or sometimes stock) that’s deposited into your investment account regularly, which you can use for living expenses or for further investing.
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A particularly simple and effective way to invest in dividend-paying stocks is via exchange-traded funds (ETFs) — funds that trade like stocks. Below are several to consider for your portfolio — some of which feature relatively high yields and some that offer lower ones.
|
ETF |
Recent Yield |
5-Year Average Annualized Return |
10-Year Average Annualized Return |
|---|---|---|---|
|
iShares Preferred & Income Securities ETF (PFF 0.40%) |
6% |
3.05% |
3.73% |
|
SPDR Portfolio S&P 500 High Dividend ETF (SPYD 0.34%) |
4.20% |
8.94% |
N/A |
|
Schwab U.S. Dividend Equity ETF (SCHD -0.03%) |
3.64% |
13.14% |
11.63% |
|
Fidelity High Dividend ETF (FDVV -0.27%) |
2.71% |
14.77% |
N/A |
|
Vanguard High Dividend Yield ETF (VYM -0.13%) |
2.66% |
11.37% |
10.08% |
|
iShares Core Dividend Growth ETF (DGRO -0.05%) |
2.24% |
12.15% |
11.92% |
|
SPDR S&P Dividend ETF (SDY 0.20%) |
2.27% |
9.18% |
11.76% |
|
Vanguard Dividend Appreciation ETF (VIG -0.17%) |
1.68% |
12.90% |
11.73% |
|
First Trust Rising Dividend Achievers ETF (RDVY -0.09%) |
1.47% |
15.34% |
13.24% |
|
Vanguard S&P 500 ETF (VOO -0.32%) |
1.22% |
15.70% |
13.21% |
Source: Morningstar.com. Figures as of Nov. 25, 2024.
Here are some things to keep in mind as you peruse the table above.
- Dividend yields — the percentage of the value of your holdings that you’ll receive in annual payouts — vary widely.
- A fat dividend yield is certainly compelling. If you’ve invested $10,000 and are earning a 4% yield, you can expect around $400 in dividends annually.
- Investments with lower yields can sometimes be better choices — particularly if their payouts are growing at a fairly rapid clip. A 2% yield, for example, can become a 4% or 6% yield over time for buy-and-hold investors.
- It’s smart to consider dividend growth, as healthy and growing companies will tend to increase their payouts over time, sometimes by double-digit percentage rates.
- Many ETFs with lower current dividend yields sport more impressive average annual total returns.
So as you ponder these (and perhaps other) dividend-producing ETFs, think about whether you’re looking for big yields now or whether you’re willing to wait for dividends to grow over time. In addition, consider if you’d favor an ETF that prioritizes share price growth, even if it means a lower yield.
You would do well to take a closer look at any of the ETFs above that interest you. Below, you’ll find a little information on some of them.
iShares Preferred & Income Securities ETF
While most of the ETFs above invest in common stock, this one focuses on preferred stock — an asset type that has features of both stocks and bonds. Preferred stock tends to not appreciate in value very much from year to year, but its dividend payouts tend to be generous.
Schwab U.S. Dividend Equity ETF
This popular ETF tracks the Dow Jones U.S. Dividend 100 index, holding 100 stocks from high-quality companies that have paid dividends for at least 10 years. It offers both a respectable dividend yield and a solid performance record.
Vanguard S&P 500 ETF
This simple S&P 500 index fund is in the table partly for comparison purposes, allowing you to see how much faster or slower other ETFs have grown with respect to the benchmark index. However, it’s also a dividend payer, because more than 400 of the companies in the S&P 500 pay dividends. This ETF’s payout won’t be big at first, but over time, your effective yield will rise. (Effective yield is the payout you’ll receive in a given year compared to your initial investment, as opposed to the current value of your stake in the fund.)
Also important, the S&P 500 — which has as its components 500 of the largest public companies in the U.S. — has a solid long-term performance record, averaging annual returns close to 10% over long periods.
Including dividend-paying investments in your portfolio is a great way to accumulate a lot of passive income that you can deploy for whatever purpose you choose.
Selena Maranjian has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool has positions in and recommends Vanguard Dividend Appreciation ETF, Vanguard S&P 500 ETF, and Vanguard Whitehall Funds – Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.
