3 High-Yield Dividend ETFs to Buy to Generate Passive Income
Dividend stocks can be a great way to get income without sacrificing the potential for long-term growth, but choosing individual dividend stocks isn't the best option for everyone. Fortunately, there are some excellent exchange-traded funds (ETFs) with dividend yields that are significantly higher than the typical S&P 500 company's, and they can be a great choice for investors who want to create an income stream on autopilot.
Here are three high-dividend ETFs that long-term investors, as well as those seeking current income, might want to take a closer look at.
A great all-around dividend ETF
If you're looking for a solid high-dividend ETF full of quality stocks, it's tough to make a case against the Vanguard High Dividend Yield ETF (NYSEMKT: VYM). With a rock-bottom 0.06% expense ratio, this fund tracks an index of stocks that pay above-average dividend yields, specifically excluding real estate investment trusts, or REITs.
As of this writing, the Vanguard High Dividend Yield ETF has 556 stocks in its portfolio. Top holdings include JPMorgan Chase (NYSE: JPM), Broadcom (NASDAQ: AVGO), ExxonMobil (NYSE: XOM), and Procter & Gamble (NYSE: PG), just to give you a sense of what you'd be investing in.
With a 3% yield as of this writing, the Vanguard High Dividend Yield ETF isn't the highest-yielding dividend ETF in the market. But it's a great combination of income and long-term growth potential that could be a good fit for long-term investors.
A beaten-down sector at a discount
Real estate has been one of the worst-performing sectors over the past couple of years. Since real estate investment trusts, or REITs, are extremely sensitive to rising interest rates, that's not a surprise. Rising rates tend to put pressure on income-focused stocks, and since most REITs rely on borrowed money for growth, this makes the cost of capital less attractive as well.
However, REITs are largely doing just fine, business-wise. And the Vanguard Real Estate ETF (NYSEMKT: VNQ) can be a great way to invest in them. The ETF tracks an index of about 160 real estate stocks, and its top holdings include Prologis (NYSE: PLD), American Tower (NYSE: AMT), and data center giant Equinix (NASDAQ: EQIX), just to name a few. As of this writing, the Vanguard Real Estate ETF has a 4.3% dividend yield, and if rates start to come down later this year as many expect, it could be a positive catalyst for the ETF's share price.
An even higher yield from top-quality companies
If you're looking for a high yield from top-notch businesses, the SPDR Portfolio S&P 500 High Dividend ETF (NYSEMKT: SPYD) could be a good fit for you. This low-cost index fund invests in the 80 highest-yielding companies in the S&P 500. The key differences between this ETF and the Vanguard High Dividend Yield ETF are:
The SPDR ETF focuses on the highest-yielding stocks in the benchmark index, not just those that have above-average yields.
The SPDR ETF, by definition, only invests in large-cap companies, while the Vanguard ETF includes stocks that aren't components of the S&P 500.
The SPDR ETF doesn't exclude REITs, while the Vanguard ETF specifically does. If a REIT is an S&P 500 component, it can be included in this fund's index. In fact, the largest holding of the ETF is real estate investment trust Iron Mountain (NYSE: IRM), and real estate makes up 28% of the ETF's assets.
Because of these differences, this is a much higher-yielding ETF. As of this writing, the SPDR Portfolio S&P 500 High Dividend ETF has a 4.6% yield.
Which is best for you?
There's no perfect favorite here. All three of these are rock-solid dividend stock ETFs with above-average yields and long-term upside potential. The best choice for you depends on your specific income needs and personal investment goals.
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JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Matt Frankel has positions in Iron Mountain, Prologis, and Vanguard Real Estate ETF and has the following options: short October 2024 $90 calls on Iron Mountain. The Motley Fool has positions in and recommends American Tower, Equinix, Iron Mountain, JPMorgan Chase, Prologis, Vanguard Real Estate ETF, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $180 calls on American Tower, long January 2026 $90 calls on Prologis, and short January 2026 $185 calls on American Tower. The Motley Fool has a disclosure policy.
