In today’s relatively high interest rate environment, it is not much of a challenge to get returns of 3%, 4% or even more on your money. As of this writing, you can even find 4% yields on high-yield savings accounts, CDs, and government bonds.
However, do you want a combination of high returns? And growth potential in the long term is not that simple. Dividend paying stocks are the best way to achieve a combination of growth and income, but investing in individual stocks isn’t the best way for everyone. With that in mind, here are two excellent ETFs to buy now that offer excellent dividend yields with great total return potential.
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The Vanguard ETF with high dividend yield (NYSEMKT: VYM) could be an excellent choice for investors who want passive dividend income but also don’t want to worry about their overall long-term return potential.
The short description of this ETF is that it holds a portfolio of stocks that pays an above-average dividend yield, with larger weightings going to the largest positions. The ETF’s top holdings, to name a few, are Broadcom, JPMorgan Chase, ExxonMobilAnd Home Depot. In short, the fund’s portfolio consists primarily of very solid, large-capitalization companies with stable cash flows and a long history of strong returns.
Over the past ten years, the Vanguard High Dividend Yield ETF has delivered an annualized total return of approximately 10.2%, and its expense ratio is a minuscule 0.06%, keeping your investment costs to a minimum. At the time of writing, the ETF has an annualized dividend yield of approximately 2.7%.
The real estate sector was one of the worst performers in the market in 2022 and 2023, and the main reason is its sensitivity to interest rates. Without turning this into an economics lesson, returns on income-based investments tend to rise, just as risk-free interest rates do. Because price and yield have an inverse relationship, this puts pressure on the prices of real estate investment trusts (REITs).
Conversely, REITs can get a positive tailwind if interest rates fall. The Federal Reserve has already cut interest rates and is widely expected to continue to do so over the next few years.
Regardless of the interest rate trajectory, the Vanguard Real Estate ETF (NYSEMKT: VNQ) can be a nice addition to your portfolio. This ETF, which has a dividend yield of 3.7%, invests in a weighted index of REITs. Not only have real estate investment trusts historically delivered total returns comparable to (or slightly greater than) the S&P500 (SNPINDEX: ^GSPC)but they have done so with less volatility over time.
To be clear, both ETFs could be excellent long-term investments regardless of what interest rates or the U.S. economy does in the short term. But with the Fed widely expected to continue cutting rates, this could be a good opportunity to add it to your portfolio with a positive multi-year tailwind just beginning.
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JPMorgan Chase is an advertising partner of Motley Fool Money. Matt Frankel holds positions in Vanguard Real Estate ETF. The Motley Fool holds and recommends Home Depot, JPMorgan Chase, Vanguard Real Estate ETF, and Vanguard Whitehall Funds – Vanguard High Dividend Yield ETF. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
2 High-Yield Dividend ETFs to Buy to Generate Passive Income was originally published by The Motley Fool
