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Investing in exchange traded funds (ETFs) is an excellent option for investors of all sizes and risk tolerance levels. Indeed, I’m of the view that passive investing is for everyone, in part due to the fact that so many ETFs exist with strategies that correspond well to individual investor preferences, to an incredible degree.
For investors who are looking to generate more in the way of passive income, either for retirement or another key life event, the good news is there are plenty of ETF options out there to choose from. Of course, parsing through the thousands of ETFs in the income-generating category can be difficult.
That said, the following three ETFs are among the highest-quality and largest (in terms of assets under management) I think investors would be remiss to ignore. Here’s why I think these three ETFs deserve a place in most long-term investor portfolios right now to create lifelong passive income.
Schwab U.S. Dividend Equity ETF (SCHD)
My first pick should come as no surprise to long-time readers, considering this is one of my core holdings and an ETF I think creates some of the best long-term passive income upside in the market right now. The Schwab U.S. Dividend Equity ETF (SCHD) is one of the best options in the market for those considering long-term passive income generation. I say that because this ETF’s holdings only include companies that have been paying dividends for at least a decade or longer.
Dividend consistency and future dividend appreciation over the long-term can matter just as much as up-front yield. In fact, I’d make the argument that those factors are perhaps much more important to consider, particularly for those looking to incorporate a buy and hold strategy.
In addition to filtering out core positions on the basis of historical dividend payouts, the SCHD ETF also factors in a number of quality factors I think are important, from return on equity to a number of debt metrics and the rate of dividend appreciation over time.
I think SCHD’s ultra-low expense ratio of just 0.06%, its value-tilted portfolio composition and its focus on dividend appreciation make this a passive income ETF every investor ought to at least look at.
JPMorgan Dividend Leaders ETF (JDIV)
Another top ETF option for investors looking for diversified exposure to companies with attractive dividend yields (and also the potential for significant capital appreciation upside over the long-term), the JPMorgan Dividend Leaders ETF (JDIV) is a great option to consider. With a little less than 100 stocks held in this ETF, JDIV focuses on some of the bluest-chip companies in the tech and consumer staples sector. That provides a relative defensive tilt for passive income investors, at least relative to most of the other dividend ETFs I’ve come across.
Now, this ETF does carry a higher expense ratio at around 0.47%, and its yield comes in around 1.7% (lower than many of the top high-yield ETFs, but still better than index funds). Thus, investors in JDIV are likely to be looking for longer-term capital appreciation upside with a meaningful dividend kick. That’s a reasonable approach in my view, considering the inherent quality filter paying a dividend implies for companies (requiring the cash flow growth necessary to fund a growing dividend over time).
I think this is a compelling option fro investors looking for dividend-paying blue chips with secularly growing businesses that can return cash to investors for a very long period of time.
Fidelity High Dividend ETF (FDVV)
The last ETF on this list of companies to consider is the Fidelity High Dividend ETF (FDVV).
I’d suggest this is an ETF best-suited to investors who are looking at higher up-front yields, with a current yield of around 2.8% (or more than double the average of most well-diversified index funds).
With a current expense ratio of 0.15%, I think the Fidelity High Dividend ETF is among the best passive income plays for investors looking for reasonably-priced quality dividend stocks with mid-tier yields. In other words, I think the balance FDVV provides compared to other top dividend ETFs makes this a fund long-term investors can get behind.
With some of the best world-class companies making up a considerable portion of this well-diversified fund, I think FDVV could be the sleep-at-night option so many investors are looking for. There’s a lot of value in that, I’m not going to lie.