Collecting dividends from stocks is a great way to generate income without reducing a position. Exchange-traded funds (ETFs) that pay dividends can help you take your diversified income investing game to the next level.
Sure, an ETF might not be as exciting as a hidden gem stock with market-beating potential. However, the hands-off approach to generating income from a passive investment vehicle like an ETF can be an excellent choice for those looking for a tool to help them achieve their financial goals.
Here’s why these Fool.com contributors made the choice Vanguard Energy ETF (NYSEMKT: VDE)the JPMorgan Equity Premium Income ETF (NYSEMKT: JEPI)and the SPDR S&P Dividend ETF (NYSEMKT: SDY) as three top dividend-paying ETFs that income investors can buy now.
Managing risks and generating revenue from the oilfield
Daniel Foelber (Vanguard Energy ETF): The energy sector is known for its volatility and sensitivity to oil and gas prices. While investors think of safe stocks that can generate a lifetime of passive income, they’re probably thinking of stodgy, consumer-oriented companies like Coca-cola or Procter & Gamble.
Still, the top holdings in the Vanguard Energy ETF are highly reliable dividend stocks. No less than 35.6% of the ETF is invested ExxonMobil And Chevron. ExxonMobil has had 42 consecutive years of dividend increases, compared to a streak of 37 years for Chevron. This means that despite all the recessions that have occurred since 1987, investors could count on both companies to increase their payouts.
In addition to their impressive dividend numbers, both companies also have solid yields: 3.1% for ExxonMobil and 4.3% for Chevron. The fund as a whole yields 3.3%, which is significantly higher than the S&P500 (SNPINDEX: ^GSPC) return of only 1.3%.
As for the rest of the holdings, including dozens of oil and gas exploration and production companies ConocoPhillips And EOG Resources make up 26.9% of the fund, midstream and downstream companies have a weighting of 23.6% and oilfield services companies represent 10.1%. By including a diversified portfolio of 112 investments, the fund reduces the risk of companies cutting dividends during a recession.
The Vanguard Energy ETF is a good buy for investors looking for above-market returns and who are confident in the future of the oil and gas industry.
But it’s worth mentioning that many companies, including ExxonMobil, Chevron and Western petroleuminvesting in low-carbon solutions such as carbon capture and storage, hydrogen, biofuels and more as a way to diversify their revenue streams and adapt to an energy transition that includes less fossil fuels and more renewables.
With an expense ratio of just 0.1%, the Vanguard Energy ETF is a cheap way to get your hands on a basket of dividend-paying oil and gas stocks to fuel your passive income stream.
An ETF that currently yields 7%
Lee Samaha (JPMorgan Equity Premium Income ETF): There are many ways to buy high-yield ETFs, but this fund’s strategy offers something different. The reality is that any mechanically based strategy will result in an unintended style or sector bias.
In other words, if you buy stocks that focus on one key metric — in this case, the dividend yield — your portfolio will likely be overweight stocks in industries that typically pay high yields. Likewise, you may find yourself piling into stocks with dividends that could prove unsustainable.
This ETF offers an equity-based strategy (which gives investors upside exposure to the stock market) with a monthly distribution and a current yield of over 7%. The fund differentiates itself by allocating up to 80% of its assets to equities and up to 20% to structured products that sell out-of-the-money call options on the S&P 500.
I have discussed the latter in more detail elsewhere; it allows the ETF to collect premiums when the S&P 500 falls or moves to a level below the strike price. It works to reduce volatility in the overall portfolio.
The crucial point is that the stock portion of the portfolio is not allocated on the basis of dividends, allowing the asset manager to avoid the unintended bias discussed above. For example, the manager can invest in sectors with a low dividend yield, such as technology or biotechnology, and is not required to buy shares in sectors with a high dividend yield, such as energy and utilities.
In this way, the ETF leverages the upside potential of these sectors and the benefits of diversification, while also delivering low-volatility returns to investors through a monthly distribution.
An excellent low-cost option for generating stable passive income
Scott Levine (SPDR S&P Dividend ETF): There is no shortage of strategies for building a well-diversified portfolio. But one tactic that’s hard to ignore is finding quality stocks that provide a steady stream of passive income — especially those that will last a lifetime. For this reason, the SPDR S&P Dividend ETF, with a 2.3% yield, is an ideal option for income investors.
According to State Street, the manager of the SPDR S&P Dividend ETF, the fund’s objective is to track the performance of an index of stocks included in the S&P1500 that have the highest dividend yields and have increased their payouts for at least twenty years in a row. It is no easy feat to continuously increase a dividend for more than twenty years. Thus, the 133 stocks included in the ETF can generally be recognized as representative of high-quality companies with rewarding shareholders inherent in the cultures of their companies.
Although the consumer staples and industrial sectors each represent 18% of the fund’s investments, this is not immediately apparent when looking at the highest weighted stocks. With a weighting of 2.6% Property Incomea real estate investment trust (REIT), is the largest position. the utility Southern Company and the energetic Chevron are the next two largest holdings with a weighting of 1.9% and 1.8% respectively.
For those worried about having to pay exorbitant fees to access such a high-quality income investment, their fears should be allayed by the fact that the ETF has a modest expense ratio of 0.35%.
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*Stock Advisor returns October 14, 2024
Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no positions in the stocks mentioned. Scott Levine has positions in Realty Income. The Motley Fool holds positions in and recommends Chevron, EOG Resources, and Realty Income. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
3 ETFs to Buy for a Lifetime of Passive Income was originally published by The Motley Fool
