Investors seeking stable cash flow without much work can turn to income exchange-traded funds, or ETFs. These funds invest in companies with higher-than-average dividend yields and manage the assets for you.
These ETFs involve less investor effort than other passive income methods, such as rental income and product royalties. After doing the requisite research, of course, you just put your money into a fund and watch it generate income for the next eligible distribution.
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Investors often gravitate toward these types of funds as they get closer to retirement and seek more financial stability.
What Is an Income ETF?
An income ETF is a publicly traded fund that holds income-producing assets, such as dividend stocks and bonds. These funds aim to reward investors with high distributions and target capital appreciation as a secondary objective.
Andy Wang, managing partner at Runnymede Capital Management, highlights the advantages income ETFs have over growth-oriented funds: “Income ETFs are attractive to investors who prioritize stability and cash flow over the pursuit of market-beating returns. Those looking for reliable income streams, especially as they approach retirement and aim to cover living expenses, often find low-fee, cash-flow-producing income ETFs a strategic choice.”
Sure, investors can buy their own dividend stocks, bonds and other income-producing assets. It’s possible to construct a portfolio that resembles the holdings of a fund or an index. However, you would then have to stay on top of each investment rather than having fund managers do it for you.
When reviewing income ETFs, investors should consider the fund’s historical performance, expense ratio, yield, distribution schedule and management. Each of these factors can help investors make better decisions.
For instance, a high-yield ETF may look attractive, but if that fund has an inconsistent distribution schedule and poor historical returns, it may not be the right choice. Each researched metric can offer more context.
“By examining these elements collectively, investors can make more informed decisions, aligning their investment choices with their financial goals and risk tolerance,” Wang says.
Overall, investors have a wide variety of high-quality income ETFs to choose from. These are some of the very best, along with their trailing-12-month yields:
| Income ETF | TTM Yield as of June 14 |
| iShares International Select Dividend ETF (ticker: IDV) | 6.2% |
| Schwab U.S. Dividend Equity ETF (SCHD) | 3.4% |
| SPDR S&P Dividend ETF (SDY) | 2.5% |
| Vanguard High Dividend Yield ETF (VYM) | 2.9% |
| WisdomTree U.S. Quality Dividend Growth Fund (DGRW) | 1.6% |
| iShares iBoxx $ High Yield Corporate Bond ETF (HYG) | 6.0% |
| ProShares S&P 500 Dividend Aristocrats ETF (NOBL) | 2.1% |
| Vanguard Dividend Appreciation ETF (VIG) | 1.8% |
iShares International Select Dividend ETF (IDV)
The iShares International Select Dividend ETF prioritizes high-dividend stocks in non-U.S. developed markets. It’s a useful fund for investors who want to generate dividend income away from the U.S. Most of the corporations in this fund are located in Europe, with the U.K., Italy and Spain leading the way.
The fund has a 0.51% expense ratio and a generous 5.9% 30-day SEC yield. The fund’s 12-month trailing yield is even higher, at 6.2%. IDV has nearly $4 billion in assets, with its capital spread across about 99 holdings, the majority of those being equities. The fund’s top three positions are British American Tobacco PLC (BTI), BHP Group Ltd. (BHP) and TotalEnergies SE (TTE). These three equities make up more than 11% of the fund’s total assets.
Investors will receive outsized exposure to the financial services sector, which accounts for 30.9% of the fund. The three sectors with next-highest allocations, utilities (16.5%), communications (11.6%) and materials (10%), make up a combined 38% of the portfolio.
IDV has returned an annualized 4.7% by net asset value over the past five years. So the high-yield component is mostly what income investors are after with this one.
Schwab U.S. Dividend Equity ETF (SCHD)
The Schwab U.S. Dividend Equity ETF aims to mirror the total return of the Dow Jones U.S. Dividend 100 Index. SCHD is a low-cost fund, with a 0.06% expense ratio, and is diversified across about 103 securities. The fund has $54 billion in total assets and has a quarterly distribution schedule.
The fund consists of large-cap companies that value investors would appreciate. The fund’s top four holdings are Texas Instruments Inc. (TXN), Amgen Inc. (AMGN), Lockheed Martin Corp. (LMT) and Coca-Cola Co. (KO).
SCHD goes through plenty of changes and currently has a 28% portfolio turnover rate. Each of the fund’s current top 10 holdings is about 4% of its total assets.
The top three sector concentrations are in financials, health care and consumer staples. These sectors combined encompass about half of the fund’s holdings.
SCHD has a 30-day SEC yield of 3.8% and a trailing-12-month yield of 3.4%. The fund has returned an annualized 11.6% over the past five years as of June 14.
SPDR S&P Dividend ETF (SDY)
The SPDR S&P Dividend ETF has more than $20 billion in assets under management, or AUM, and a 0.35% expense ratio. The fund uses the S&P High Yield Dividend Aristocrats Index as its benchmark, which means it consists only of dividend stocks that have increased their payouts for at least 20 consecutive years.
SDY is composed of 133 holdings and has a 30-day SEC yield of 2.6%, with a similar 12-month yield. Its top three holdings are Realty Income Corp. (O), Southern Co. (SO) and Xcel Energy Inc. (XEL). These three stocks make up more than 6% of the fund’s total assets.
The top three sector concentrations are industrials, consumer staples and utilities, which make up more than half of the fund’s total positions. As of June 14, SDY has a 10-year annualized return of 9.2%.
SSGA Funds Management oversees SDY. The firm manages more than $4.3 trillion in assets based on its first-quarter 2024 results. Global Equity Beta Solutions is the fund’s management team.
Vanguard High Dividend Yield ETF (VYM)
The Vanguard High Dividend Yield ETF focuses on large-cap value stocks and has a 0.06% expense ratio. It’s no surprise to see the Vanguard fund with a low expense ratio; most of the brokerage firm’s funds don’t cost much to own. Furthermore, the fund has a 30-day SEC yield of 2.8%.
VYM tracks the FTSE High Dividend Yield Index, which has paid off for the passively managed fund over the past five years with a 9.9% annualized return. VYM spreads its funds across 556 stocks and has JPMorgan Chase & Co. (JPM), Broadcom Inc. (AVGO) and Exxon Mobil Corp. (XOM) in its top three holdings. These equities make up roughly 10% of the fund’s assets.
VYM concentrates on financials, industrials and health care holdings. Although the top three sectors account for more than 45% of the fund’s assets, financials are doing the heavy lifting, with more than 20% of assets.
Gerard C. O’Reilly is the principal portfolio manager for VYM, and he has advised the fund since 2016. O’Reilly has deep experience in managing Vanguard stock index portfolios going back to 1994.
WisdomTree U.S. Quality Dividend Growth Fund (DGRW)
WisdomTree U.S. Quality Dividend Growth is a top-performing, $13 billion income ETF with a 14.9% annualized return over the past five years as of June 14. That top-shelf return also comes with a 1.6% 30-day SEC yield. DGRW has been especially hot over the past year, gaining 21.3% thanks to its heavy concentration in tech stocks.
The fund’s top three holdings are Microsoft Corp. (MSFT), Apple Inc. (AAPL) and Broadcom, which make up 17% of its portfolio. DGRW has 30.8% of its assets in technology stocks, followed by health care, industrials and financials at a combined 38.4%.
Rated five stars by Morningstar, DGRW has a reasonable 0.28% expense ratio for its attractive mix of price appreciation and dividend payouts. Mellon Investments Corp. and WisdomTree Asset Management co-manage the fund. Marlene Walker-Smith has the most seniority and has been on the fund’s management team since 2020.
iShares iBoxx $ High Yield Corporate Bond ETF (HYG)
With $17.5 billion in total assets and a 0.49% expense ratio, iShares iBoxx $ High Yield Corporate Bond usually offers high yield in exchange for lower returns, though you’d never know it from its one-year return of 9.5%. The fund doesn’t have a five-year return that compares with some of the other funds on this list, however.
HYG prioritizes U.S. dollar-denominated high-yield corporate bonds and has a 7.4% 30-day SEC yield. HYG’s assets are spread pretty thinly across more than 1,200 bond holdings.
This fixed-income fund’s top three sectors are consumer cyclical, communications and consumer non-cyclical, composing roughly half of the fund’s total assets. More than two-thirds of the fund’s positions mature within three to seven years. HYG has a 0.43 beta, which is lower than most income funds. The low beta makes its price less sensitive to day-to-day market movements.
ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
The ProShares S&P 500 Dividend Aristocrats ETF exclusively focuses on dividend aristocrats that have raised their dividends for at least 25 consecutive years. These stocks tend to have stable financials and solid fundamentals. The fund has a 0.35% expense ratio and a 2.1% dividend yield.
Investors get exposure to 67 companies, with Air Products & Chemicals Inc. (APD), C.H. Robinson Worldwide Inc. (CHRW) and Essex Property Trust Inc. (ESS) as the top three holdings. These three stocks make up more than 5% of the fund’s total assets. The consumer defensive sector has the most representation, at 23.7% of assets, a higher weighting than the ETF’s large-value peers. Industrials is the sector with the next-highest allocation.
NOBL has $11.6 billion in assets under management and has delivered an annualized return of 9.2% over the past five years. Michael Neches and Devin Sullivan, the fund’s managers, have 11 and six years at the helm, respectively.
Vanguard Dividend Appreciation ETF (VIG)
The Vanguard Dividend Appreciation ETF has performed well compared to other income ETFs. The fund has an 11.9% annualized return over the past five years as of June 14, with a 12.8% annualized return over 15 years. In addition, investors get a modest 1.8% 30-day SEC yield.
The fund uses the S&P U.S. Dividend Growers Index as its benchmark. VIG prioritizes large-cap stocks that have a record of consistently raising their dividends. The fund spreads its $79 billion in total assets across 342 holdings. The top three stocks in its portfolio are Microsoft, Apple and Broadcom.
VIG leans toward the information technology sector, which represents almost a quarter of the fund’s assets. The next-highest allocations are in financial, health care and industrial stocks. As if the appreciation and steady dividends weren’t enough, VIG also has an ultra-low expense ratio of 0.06%, contributing to its impressive long-term returns. The fund’s managers, Walter Nejman and O’Reilly, have led the fund since 2016.
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8 Best Income ETFs to Buy in 2024 originally appeared on usnews.com
Update 06/17/24: This story was previously published at an earlier date and has been updated with new information.
