Generating passive income can be very exciting for some investors. The idea of earning steady cash flow from investments without having to work for it is appealing, whether you need it to supplement your work earnings or to supplement your Social Security income. One avenue for generating that passive income is through investment in exchange-traded funds (ETFs) designed to generate dividends. These ETFs own a selection of individual stocks based on specific criteria and offer an easy way to diversify your portfolio through a single investment.
The trick, of course, is that you need to choose wisely. Sometimes, higher dividend yield options that could provide more passive income also come with a greater potential for the dividend to be adversely affected by changes in the economy. It can pay to be careful here since no one wants to see their dividends cut. You can diversify even more by investing in a select group of ETFs that each target different sectors, geographies, and/or industries.
To help investors find the right ETF for their particular needs, here are four ETFs that offer a range of yields, exposure to different sectors and geographic regions, and expense ratios. Any of the four can help you generate that desired passive income.
1. Schwab U.S. Dividend Equity ETF
The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is designed to track the Dow Jones U.S. Dividend 100 index. This index contains high-yielding U.S. stocks that have built a track record of dividend payments. It also selects companies based on their strength as measured by analysis of financial numbers. The stocks that make up this index come from multiple sectors, providing solid diversity with financial stocks making up the largest weighting (17.4%). That’s followed by healthcare stocks (15.7%), consumer staples (13.9%), industrials (13.5%), and energy (12.8%). By indexing passively, the ETF’s expense ratio remains low (0.06%), which means more of the earnings go to the investor rather than to Schwab. The fund generates a 3.8% yield, more than triple the yield of the average S&P 500 stock (1.3%).
2. iShares International Select Dividend ETF
The iShares International Select Dividend ETF (NYSEMKT: IDV) provides exposure to high dividend payers outside the United States. It invests in companies in Europe, the Pacific and Asian regions, and Canada (EPAC). It has a relatively high 0.53% expense ratio, but it also features a hefty 5.9% yield. Financials are the largest sector with over a 31% weighting. That’s followed by utilities (16.1%), communications (11.5%), materials (9.8%), and energy (8.3%). The ETF has most of its assets invested in Europe, with the United Kingdom having the largest weighting by country at 23.5%, followed by Italy at 10.1%, and Spain’s 8.8% rounding out the top three. Made up of about 100 stocks, this passive ETF tracks the Dow Jones EPAC Select Dividend Index.
3. iShares iBoxx $High Yield Corporate Bond ETF
The iShares iBoxx $High Yield Corporate Bond ETF (NYSEMKT: HYG) tries to track the Markit iBoxx USD Liquid High Yield Index. As the name says, it invests in corporate high-yield bonds denominated in U.S. dollars. High-yield bonds are issued by companies with less than an investment-grade rating: BB+ or lower by the major rating agencies, S&P Global, Moody’s, and Fitch Ratings. Hence, this indicates that they have a higher credit risk than companies with an investment-grade rating. But investors willing to bear some increased risk will receive a greater reward: The ETF has a 7.4% yield. Investors should also note that it has a 0.49% expense ratio.
4. Vanguard High Dividend Yield ETF
The Vanguard High Dividend Yield ETF (NYSEMKT: VYM) invests passively, tracking the FTSE High Dividend Yield Index. This includes U.S. stocks with a high forecast for yield. The ETF has its largest sector weighting in financial stocks at 20.7%. That’s followed by industrials (12.6%), healthcare (11.7%), consumer staples (11.1%) and energy (10.6%). Technology has a 10.1% weighting. It has a 2.8% yield and a low 0.06% expense ratio.
In conclusion, investing in ETFs that generate dividends can be a great way to generate passive income. By carefully selecting ETFs that offer a balance of yield, exposure to different sectors and regions, and expense ratios, investors can create a diversified portfolio that provides steady cash flow. Whether you choose the Schwab U.S. Dividend Equity ETF, iShares International Select Dividend ETF, iShares iBoxx $High Yield Corporate Bond ETF, or Vanguard High Dividend Yield ETF, each of these options can help you achieve your goal of generating passive income.
