Exchange-traded funds (ETFs) are excellent passive investment vehicles. They hold baskets of stocks or other investments, which helps provide diversification and reduce risk. As a result, you do not have to spend time managing these investments.
Many ETFs are designed to generate income, making them ideal investments for those looking for a portfolio that will provide them with reliable passive income. THE Vanguard High Dividend Yield ETF(NYSEMKT:VYM) and the iShares Preferred and Income ETFs(NASDAQ:PFF) are two excellent Dividend ETF.
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The Vanguard High Dividend Yield ETF focuses on holding common actions with values above average dividend yields. The fund currently offers a yield of around 2.7%— more than double the average yield of S&P500who hovered recently around 1.2%.
To put this into perspective, a $1,000 investment in this ETF would generate approximately $27 in dividend income each year. This compares to about $12 in dividend income for an ETF that tracks the S&P 500. This ETF provides than higher low-cost revenue stream. It is spending rate is 0.06%, that's to say charges investors $0.60 in fees per year for every $1,000 invested in the fund.
The fund's portfolio currently includes 536 stocks, but with larger allocations to its top holdings. The five the biggest the positions are:
Broadcom (4.4% of fund assets): dividend yield of 1.3%.
JPMorgan Chase (3.6%): yield 2%.
ExxonMobil (3%): yield 3.4%.
Home deposit (2.2%): yield of 2.1%.
Procter & Gamble (2.2%): yield of 2.3%.
These top five represent more than 15% of its total assets. However, it is worth noting that these are some of the highest quality dividend stocks in the world. They have long streaks of increase their payments and have strong financial profiles.
This dividend growth is important. This allowed the fund to distribute more income to investors each year. Additionally, the price of the fund has been on a fairly consistent upward trend over time.
While this past performance is no guarantee that the fund will continue to generate growing streams of dividend income, its higher concentration in the highest quality, high-yielding dividend stocks bodes well for the future. It should be able to provide investors with a growing income stream while increasing the value of their investment.
The iShares Preferred and Income Securities ETF holds preferred shares and hybrid securities. These investments behave like a combination of bonds and stocks. They tend to have higher fixed payments and are riskier investments than bonds, but not as risky as common stocks.
This ETF has a yield of about 6% — much higher than the Vanguard fund — and makes its distributions monthly. Its expense ratio is also higher, at 0.46%.
The fund currently has 441 securities, primarily preferred stocks issued by leading financial institutions such as Wells Fargo, Citi Groupand JPMorgan. Financial institutions represent nearly 75% of its portfolio. The fund also holds preferred and hybrid securities of industrial companies (nearly 16%) and utilities (nearly 10%).
The fund's monthly payments tend to be relatively stable.
Likewise, as the chart shows, the price of the fund Also tends to be relatively stable. Changes in interest rates are the main factors that influence its price. As interest rates rise, the value of the fund's holdings tends to fall, increasing the income yield. This is because preferred stocks have higher risk profiles than bonds. Their higher returns reward investors who accept this higher risk.
The Vanguard High Dividend Yield ETF and the iShares Preferred and Income Securities ETF are ideal for generating passive income. The Vanguard High Dividend Yield ETF provides a steadily increasing income stream, while the iShares Preferred and Income Securities ETF provides a higher yielding, relatively fixed passive income stream. The funds can be a great income-generating tandem.
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Citigroup is an advertising partner of Motley Fool Money. Wells Fargo is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Matt DiLallo holds positions in Broadcom, Home Depot and JPMorgan Chase. The Motley Fool has positions in and recommends the Home Depot, JPMorgan Chase, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETFs. The Motley Fool recommends Broadcom. The Mad Motley has a disclosure policy.
