3 Great High-Yield ETFs for Decades of Passive Income

Source The Motley Fool

The Global X Super Dividend U.S. ETF (NYSEMKT: DIV), the JPMorgan Equity Premium Income ETF (NYSEMKT: JEPI), and the Vanguard Total Corporate Bond ETF (NASDAQ: VTC) are excellent options for investors looking for monthly income. These three dividends generate an average dividend yield of 5.7% and offer a relatively safe way to get exposure to higher-quality U.S. assets, including large-cap equities and investment-grade corporate bonds.

These three ETFs are valuable additions to the portfolios of risk-averse investors. Each ETF has different characteristics, but all three perform regardless of the broader market conditions.

1. Global X Super Dividend U.S. ETF: Dividend yield 6.1%

I'll start with the easiest-to-understand ETF. Currently yielding 6.1% and paying monthly distributions, the Global X ETF invests in 50 of the top-yielding stocks in the U.S. However, it's not a purely mechanical process, as the ETF's managers use a methodology to look for so-called "low-beta" stocks to try to generate low-volatility returns.

In plain English, low-beta stocks have statistically demonstrated lower volatility than the index, usually the S&P 500. They are seen as less risky, both on the downside and the upside. Still, income-seeking investors won't worry so much about the latter, as their priority is usually the surety of the dividend income.

Looking into the ETF's holdings, it's no surprise to see utilities well represented, with 19.5% of holdings, real estate investment trusts (REITs) at 18.8%, and consumer staples at 11.3%. The high-yielding energy sector is well represented, at 19.9% of holdings. There's hardly any exposure to more cyclical sectors like information technology and industrials.

As such, it's reasonable to expect this ETF to underperform when the technology sector is hot and the energy sector is weak. Moreover, it's likely to underperform in strong bull markets.

Still, as evidence of the benefit of its low-volatility strategy, here's a look at total returns in 2022 when the S&P 500 declined significantly.

DIV Total Return Level Chart

DIV Total Return Level data by YCharts

2. The JPMorgan Equity Premium Income ETF: Dividend yield 7%

Speaking of low-volatility returns, this JPMorgan ETF has it as a key aim of its strategy. Up to 80% of the ETF is allocated toward equities management considers generating returns. This is an actively managed strategy, so you are investing in the stock-picking abilities of its managers.

Interestingly, the ETF's prospectus states, "The Fund may receive income to the extent it invests in equity securities of companies that pay dividends; however, securities are not selected based on anticipated dividend payments.

As such, you should not consider the equity part of the strategy similar to the yield-chasing strategy of the Global X ETF. That's a plus if you want to avoid the unintentional sector biases (for example, overweight energy, underweight technology) that occur with the Global X ETF and other high-yield equity ETFs.

The ETF invests up to 20% of its assets in financial instruments that act as selling call options on the S&P 500. When buying an S&P 500 call option, an investor pays a premium for the right to buy the index at a specified price (the strike price) in the future. It's a bullish strategy because the investor hopes the index will go up in price so that they can buy the index at the strike price and pocket the difference between the current price at the strike price, minus the premium.

It follows that the seller of the call option will lose money if the index rises sharply. However, the seller of the call option (the strategy that the ETF is following) will pocket the premium if the S&P 500 declines or doesn't rise enough above the strike price.

As such, the ETF option strategy makes money when markets are declining or generating moderate returns, helping offset the decline in its equity portfolio. On the other hand, when equity markets are rising sharply, the options strategy will lose money and negatively offset the gains on the equity side.

This idea is to benefit from the upside of equities, but with reduced low volatility, while generating income to make monthly distributions.

3. Vanguard Total Corporate Bond ETF: Dividend yield 4.1%

Corporate bonds tend to do well when interest rates are falling and badly when rates rise. The reason is simple: As the risk-free rate (government-backed bonds) rises, investors will demand more yield from corporate bonds to compensate for the extra risk, meaning bond yields go up and prices go down.

This ETF only invests in investment-grade corporate bonds and is a relatively low-risk bond ETF. According to Fitch, about 45% of its assets are in A-rated bonds, 8.4% in AA or above, and more than 47% in BBB bonds -- those classified as investment grade, with a low risk of default. These are high-quality assets.

As such, the risk in this ETF is mainly in a scenario where interest rates are rising. Alternatively, the ETF will do well when interest rates are falling (as they are now). All the while, investors can pick up a decent monthly income.

All told, these three ETFs provide excellent income across a range of market conditions and are worth considering as additions to a diversified portfolio.

Should you invest $1,000 in Global X Funds - Global X SuperDividend U.s. ETF right now?

Before you buy stock in Global X Funds - Global X SuperDividend U.s. ETF, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Global X Funds - Global X SuperDividend U.s. ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $716,988!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of September 30, 2024

Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
placeholder
Nvidia Earnings Approach: Can It Drive a Nasdaq Rebound? What Should Investors Watch Most?On May 20, ET, NVIDIA ( NVDA )'s first-quarter fiscal 2026 earnings report, to be released after the market close, has become the market focus. The options market has already reacted; bas
Author  TradingKey
8 hours ago
On May 20, ET, NVIDIA ( NVDA )'s first-quarter fiscal 2026 earnings report, to be released after the market close, has become the market focus. The options market has already reacted; bas
placeholder
Gold Prices Fall Below Key $4,500 Mark, US Treasury Yields Rise for Seventh Day, Gold May Fall to $4,100On Tuesday (May 19), gold ( XAUUSD) closed at $4,481.89. The price confirmed a break below $4,500, further opening up the downside. On Wednesday, gold extended its downward trend from the
Author  TradingKey
14 hours ago
On Tuesday (May 19), gold ( XAUUSD) closed at $4,481.89. The price confirmed a break below $4,500, further opening up the downside. On Wednesday, gold extended its downward trend from the
placeholder
Gold falls below $4,500 on rising global rate hike bets Gold price (XAU/USD) faces some selling pressure near $4,480 during the early Asian session on Wednesday. The precious metal drops to its lowest since March 30 as persistent inflation fears keep interest rate hike expectations and Treasury yields high.
Author  FXStreet
17 hours ago
Gold price (XAU/USD) faces some selling pressure near $4,480 during the early Asian session on Wednesday. The precious metal drops to its lowest since March 30 as persistent inflation fears keep interest rate hike expectations and Treasury yields high.
placeholder
Bitcoin Price Forecast: BTC battles at key technical zone amid mixed flow signalsBitcoin (BTC) steadies around the key technical support on Tuesday after its recent correction. The Crypto King’s next directional move could hinge on this key technical zone.
Author  FXStreet
Yesterday 10: 07
Bitcoin (BTC) steadies around the key technical support on Tuesday after its recent correction. The Crypto King’s next directional move could hinge on this key technical zone.
placeholder
WTI declines below $102.00 after Trump says he called off Iran attacksWest Texas Intermediate (WTI), the US crude oil benchmark, is trading around $101.85 during the early Asian trading hours on Tuesday. The WTI price declines after US President Donald Trump said he was holding off a military attack on Iran planned for Tuesday at the request of Gulf states.
Author  FXStreet
Yesterday 01: 17
West Texas Intermediate (WTI), the US crude oil benchmark, is trading around $101.85 during the early Asian trading hours on Tuesday. The WTI price declines after US President Donald Trump said he was holding off a military attack on Iran planned for Tuesday at the request of Gulf states.
goTop
quote