These ETFs provide investors with above-average income streams.
Investing in exchange-traded funds (ETFs) can be a great way to generate passive income. Many ETFs focus on holding income-generating assets like dividend-paying stocks or bonds. Meanwhile, you don't have to actively manage ETFs like you would a portfolio of stocks and bonds, making the income they produce as passive as it gets.
The Schwab U.S. Dividend Equity ETF (SCHD 0.91%), SPDR Portfolio High Yield Bond ETF (NYSEMKT: SPHY), and JPMorgan Nasdaq Equity Premium Income ETF (JEPQ 1.64%) stand out as top ETFs for those seeking to generate passive income this May.
Quality dividend income
The Schwab U.S. Dividend Equity ETF is a passively managed fund that aims to track the Dow Jones U.S. Dividend 100 Index. That index measures the performance of 100 high-yielding dividend stocks with records for paying consistent dividends. These stocks also tend to have strong financial metrics compared to their peers.
The fund's top five holdings are:
- Texas Instruments: The semiconductor company was 4.1% of the fund's holdings and had a 2.9% dividend yield.
- Bristol-Meyers Squibb: The pharmaceutical company was 4% of the fund's holdings and had a 5.4% dividend yield.
- Lockheed Martin: The defense contractor was 4% of the fund's holdings and had a 2.7% dividend yield.
- PepsiCo: The beverage giant was 4% of the fund's holdings and had a 2.9% dividend yield.
- Verizon: The telecom company was 4% of the fund's holdings and has a 6.6% dividend yield.
The ETF offers a high dividend yield because it focuses on higher-yielding dividend stocks. Its yield over the last 30 days is 3.8%, and 3.3% over the last 12 months. That's more than double the S&P 500's 1.4% dividend yield. Put another way, every $1,000 invested in the fund would have produced $33 of dividend income over the past year. That compares to $14 for that same amount in an S&P 500 index fund.
This passively managed ETF charges investors a rock-bottom ETF expense ratio of 0.06%. That enables investors to keep more of the dividend income the fund's holdings generate. Like many dividend stocks, the fund makes quarterly distribution payments to fund investors.
High-quality junk
The SPDR Portfolio High Yield Bond ETF provides investors access to high-yield debt (i.e., junk bonds). While junk bonds carry higher default risk than investment-grade bonds, they offer higher yields. This passively managed ETF tracks the ICE BofA US High Yield Index.
The ETF holds over 1,900 bonds. That provides investors with diversified exposure to the high-yield bond market. It also has a fairly well-laddered maturity schedule. These factors help reduce risk.
The fund distributes income to investors each month, making it ideal for those seeking a recurring income stream. The ETF's annualized yield on its last distribution payment was 8%, while the yield over the past year was 7.7%. This fund also charges a very low ETF expense ratio of 0.05%, enabling investors to keep more of the income the bonds generate.
A premium income stream
The JPMorgan Nasdaq Equity Premium Income ETF is an actively managed fund that seeks to provide investors with monthly income. It also aims to provide exposure to the Nasdaq-100 Index with less volatility.
The ETF has a dual strategy. It holds an underlying equity portfolio that the managers select based on a combination of data science and fundamental research. While the fund focuses on stocks in the Nasdaq-100 index, it doesn't aim to match the index's allocation.
On top of that, the fund's managers implement a disciplined options overlay strategy. They write out-of-the-money call options on the Nasdaq-100 Index to generate options premium income to distribute to investors each month.
The fund's strategy generates meaningful income. It has delivered a 9.2% annualized yield over the past month and 10.8% over the past year. Meanwhile, the actively managed fund charges a very competitive ETF expense ratio of 0.35%. That low rate means investors receive more of the income the fund produces.
Excellent ways to start generating passive income this month
ETFs make it easy to start collecting passive income. The Schwab U.S. Dividend Equity ETF, SPDR Portfolio High Yield Bond ETF, and JPMorgan Nasdaq Equity Premium Income ETF stand out as some of the top options this month. They offer high-yielding income streams and charge low rates, making them ideal for investors seeking to start building new passive income streams this month.
Matt DiLallo has positions in Bristol Myers Squibb, J.p. Morgan Exchange-Traded Fund Trust-JPMorgan Nasdaq Equity Premium Income ETF, SPDR Series Trust-SPDR Portfolio High Yield Bond ETF, and Verizon Communications. The Motley Fool has positions in and recommends Bristol Myers Squibb and Texas Instruments. The Motley Fool recommends Lockheed Martin and Verizon Communications. The Motley Fool has a disclosure policy.
