3 Dividend-focused Etfs That Are Coiled Springs For A Lifetime Of Passive Income
Generating passive income from a diversified portfolio is a recipe for compounding wealth and not letting your investments keep you up at night. Exchange-traded funds (ETFs) that invest in dividend-paying companies can be an excellent way to achieve these objectives. Some ETFs incorporate more complex strategies for income generation, like covered calls or other derivatives contracts.
Here's why the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD), JPMorgan Equity Premium Income ETF (NYSEMKT: JEPI), and the SPDR Dow Jones Industrial Average ETF (NYSEMKT: DIA) are three ETFs to consider buying in June.
Image source: Getty Images.
The Schwab U.S. Dividend Equity ETF offers a high yield and diverse exposure
Scott Levine (Schwab U.S. Dividend Equity ETF): For investors who are seeking a high-yield opportunity but are also interested in mitigating risk, the Schwab U.S. Dividend Equity ETF is an ideal choice. With 103 holdings, the ETF is less sensitive to a dividend cut from any individual stock, providing investors with greater certainty that the yield -- currently at 3.5% -- will remain intact.
According to Charles Schwab, the company managing the fund, the aim of the Schwab U.S. Dividend Equity ETF is to "track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Dividend 100 Index." An index of high-yielding U.S. stocks, the Dow Jones U.S. Dividend 100 Index focuses on stocks with consistent track records of paying dividends. Just as appealing as the ETF's high yield is the fact that investors won't lose much of that passive income to management fees. The Schwab U.S. Dividend Equity ETF has a total expense ratio of only 0.06%.
While financials make up the largest portion of the ETF, accounting for 17.4% of holdings, there is ample representation from other sectors as well. Health care and consumer staples stocks represent 15.7% and 13.9%, respectively, with industrials stocks at 13.5% and energy tickers at 12.8%. Semiconductor specialist Texas Instruments stands as the biggest position in the ETF, while pharmaceutical stock Amgen and defense powerhouse Lockheed Martin occupy the second and third spots among the largest holdings.
The JPMorgan Equity Premium offers retail investors something different
Lee Samaha (JPMorgan Equity Premium ETF): It's not difficult to get exposure to equities; you can buy a bunch of large-cap stocks or an index-hugging ETF. However, it's much harder for retail investors to get exposure to this fund's strategy.
The actively managed ETF invests at least 80% of assets into relatively low-volatility, dividend-paying stocks to generate monthly yields. You can think of it as giving correlated exposure to the S&P 500. However, the fund tries to protect against price drops by investing up to 20% of its funds in options contracts that profit when the S&P 500 index declines.
This strategy is known as selling call options. When you sell a call option, you are betting a stock (or in this case, the S&P 500 index) doesn't go over a set price before a set date. The person or fund that buys the call option thinks the price will be higher than the set price and pays a fee (known as a premium) to buy it if it goes over that price.
Therefore, the ETF will earn returns from the premiums it collects from those contracts, and if the S&P 500 doesn't go over the price of the contract, it doesn't have to sell to the buyer. Earnings premiums from these contracts help to offset any declines in stock prices.
It's a strategy intended to ensure investors get monthly income from the ETF while generating relatively low-volatility returns. That might suit many investors looking for such an instrument, not least because the fund's trailing-12-month dividend yield is currently close to 7.7%.
This ETF allows you to invest in all 30 industry-leading Dow Jones Industrial Average stocks
Daniel Foelber (SPDR Dow Jones Industrial Average ETF): Many high-yield ETFs focus on stodgy dividend-paying value stocks. But for a lifetime of passive income, it's paramount to find companies with a runway for earnings growth allowing them to grow their dividends and reinvest in their operations. A simple and easy-to-understand ETF that balances income, value, and growth is the SPDR Dow Jones Industrial Average ETF.
With $31.4 billion in net assets and an expense ratio of 0.16%, the ETF is a low-cost way to mirror the performance of the Dow Jones Industrial Average. The "Industrial Average" part of the index's name is due to its history, not its current composition; only 14% of the SPDR Dow Jones Industrial Average ETF is in the industrial sector. Growth stocks like Apple, Microsoft, Amazon, and Salesforce are all Dow components. Due to high concentrations in Goldman Sachs, Visa, American Express, and JPMorgan Chase, financials hold a 23.2% weighting, the highest of any sector in the Dow.
This ETF is unusual because it contains just 30 holdings, so each position carries more weight. This is an important distinction from some of the larger low-cost funds, which often feature hundreds of holdings. The Dow ETF focuses on just one or a handful of companies to represent each sector, rather than investing a portion of the fund in dozens of top players.
The SPDR Dow Jones Industrial Average ETF features a yield of 1.8% and a price-to-earnings ratio of 23.6 -- giving it a higher yield and a lower valuation than comparable ETFs focused on the S&P 500 and Nasdaq-100 indexes.
If you're looking to invest in recognizable dividend-paying companies, consider the SPDR Dow Jones Industrial Average ETF.
Should you invest $1,000 in Schwab U.S. Dividend Equity ETF right now?
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 Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $671,728!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.
*Stock Advisor returns as of May 28, 2024
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. American Express is an advertising partner of The Ascent, a Motley Fool company.
Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Charles Schwab, Goldman Sachs Group, JPMorgan Chase, Microsoft, Salesforce, Texas Instruments, and Visa. The Motley Fool recommends Amgen and Lockheed Martin and recommends the following options: long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short June 2024 $65 puts on Charles Schwab. The Motley Fool has a disclosure policy.
