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.
Investors often gravitate toward these types of funds as they get closer to retirement and seek more financial stability.
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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 | Expense Ratio |
| Schwab U.S. Dividend Equity ETF (ticker: SCHD) | 3.4% | 0.06% |
| SPDR S&P Dividend ETF (SDY) | 2.4% | 0.35% |
| Vanguard High Dividend Yield ETF (VYM) | 2.8% | 0.06% |
| WisdomTree U.S. Quality Dividend Growth Fund (DGRW) | 1.5% | 0.28% |
| ProShares S&P 500 Dividend Aristocrats ETF (NOBL) | 2.0% | 0.35% |
| Vanguard Dividend Appreciation ETF (VIG) | 1.7% | 0.06% |
| First Trust Morningstar Dividend Leaders Index Fund (FDL) | 4.1% | 0.45% |
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 holdings. The fund has $60.7 billion in total assets and invests 90% of them in high-yielding stocks of quality companies that have a consistent record of paying dividends.
The “gold standard for dividend funds,” according to Morningstar, SCHD consists of large-cap companies that value investors would appreciate. The fund’s top four holdings are Lockheed Martin Corp. (LMT), AbbVie Inc. (ABBV), Home Depot Inc. (HD) and Coca-Cola Co. (KO).
SCHD goes through plenty of changes and currently has a 29.5% 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 3.6% and a trailing-12-month yield of 3.4%. The fund has returned an annualized 12.6% over the past five years as of Sept. 16.
SPDR S&P Dividend ETF (SDY)
The SPDR S&P Dividend ETF has $21.5 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, and it consists only of dividend stocks that have increased their payouts for at least 20 consecutive years.
SDY is composed of 137 holdings and has a 30-day SEC yield of 2.3%, with a similar trailing-12-month yield. Its top three holdings are Realty Income Corp. (O), Kenvue Inc. (KVUE) and International Business Machines Corp. (IBM). These three stocks make up about 7% of the fund’s total assets.
The top three sector concentrations are consumer staples, industrials and utilities, which make up more than half of the fund’s total positions. As of Sept. 16, SDY has a 10-year annualized return of 10.2%.
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; many of the brokerage firm’s funds have low fees. Furthermore, the fund has a 30-day SEC yield of 2.6%.
VYM tracks the FTSE High Dividend Yield Index, which has paid off for the passively managed fund over the past five years with a 10.8% annualized return. VYM spreads its funds across 551 stocks and has Broadcom Inc. (AVGO), JPMorgan Chase & Co. (JPM) and Exxon Mobil Corp. (XOM) as its top three positions. These equities make up roughly 10% of the fund’s assets.
VYM concentrates on financials, consumer staples, technology 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. Nick Birkett joined the management team in February 2023.
WisdomTree U.S. Quality Dividend Growth Fund (DGRW)
WisdomTree U.S. Quality Dividend Growth is a top-performing, $14.4 billion income ETF with a 15% annualized return over the past five years as of Sept. 16. That top-shelf return also comes with a 1.5% trailing-12-month yield. DGRW has been especially hot over the past year, gaining 26.8% 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 about 16% of its portfolio. DGRW has 29.9% of its assets in technology stocks, followed by health care, financials and consumer staples at a combined 39.6% of assets.
Rated five stars by Morningstar, DGRW has a reasonable 0.28% expense ratio for its attractive mix of price appreciation and dividend payouts. Marlene Walker-Smith has the most seniority and has been on the fund’s management team since 2020. The other four managers joined the fund’s team in June 2021.
ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
The ProShares S&P 500 Dividend Aristocrats ETF exclusively focuses on “Dividend Aristocrats,” stable dividend stocks that have raised their payouts for at least 25 consecutive years. These stocks tend to have solid financials and fundamentals. The fund has a 0.35% expense ratio and a 2% trailing dividend yield.
Investors get exposure to 67 companies, with Kenvue, Clorox Co. (CLX) and Cardinal Health Inc. (CAH) as the top three holdings. The consumer defensive sector has the most representation, at 24.7% of assets, a higher weighting than the ETF’s large-value peers. Industrials has the next-highest allocation.
NOBL has $12.6 billion in assets under management and has delivered an annualized return of 10.5% over the past five years. Fund managers Michael Neches and Devin Sullivan 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 a 12.1% annualized return over the past five years as of Sept. 16, with a 12.6% annualized return over 15 years. The ETF pays a modest 1.7% trailing 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 $85.4 billion in total assets across 341 holdings. The top three stocks in its portfolio are Apple, Broadcom and Microsoft.
VIG leans toward the information technology sector, which represents almost a quarter of the fund’s assets. The next-highest allocations are in financial services, health care and consumer staples stocks. As if the steady dividends weren’t enough, VIG also has an ultra-low expense ratio of 0.06%, contributing to its impressive long-term returns. Walter Nejman and O’Reilly have led the fund since 2016.
First Trust Morningstar Dividend Leaders Index Fund (FDL)
The First Trust Morningstar Dividend Leaders Index Fund has 100 stock holdings, with AbbVie, Verizon Communications Inc. (VZ) and Chevron Corp. (CVX) as the top three positions. These stocks make up about 24% of the fund’s total assets.
FDL primarily spreads its $4.4 billion in assets across health care, consumer staples and financials stocks. Those three sectors make up more than half of the fund’s total positions. FDL offers a 30-day SEC yield of 4.2% with a 0.45% expense ratio.
The fund has an annualized return of 10.8% over the past five years and a 26% return over the past year. The average tenure of the fund’s seven managers is 15 years.
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7 Best Income ETFs to Buy Now originally appeared on usnews.com
Update 09/17/24: This story was previously published at an earlier date and has been updated with new information.
