All it takes is one or a handful of dividend ETFs to build a sound income portfolio around. And while investors can and should consider also adding a few individual higher-yielding names to drive up the average portfolio yield, I’m an advocate for starting with the foundation first as one seeks to build from there. At the end of the day, you need a strong foundation if you want a portfolio that is not only designed to perform but also produce a steady (and growing) flow of passive income built to last indefinitely.
In this piece, we’ll check out a trio of income ETFs that are a great choice for investors looking to go down the passive income path this July. And while the following ETFs offer more yield and a steadier ride than the S&P 500, I wouldn’t view them as a replacement for bonds, CDs (Certificates of Deposit), or precious metals unless, of course, you’re willing to take the risks for the much-better potential rewards offered by the equities found within the following dividend ETFs.
In this piece, we’ll look at two very different flavors of dividend ETFs and one individual stock (with a 7.2% yield) that can act as a yield booster for a portfolio looking to crank up the yield for the summer.
Schwab U.S. Dividend ETF
First, we have the Schwab U.S. Dividend ETF (NYSEARCA:SCHD), which I find to be one of the most solid foundations that an income portfolio could ask for. Indeed, of all the three dividend plays on this list, I find this ETF to be the most critical pillar to build around.
And while I wouldn’t be against putting a vast majority of one’s portfolio into the stellar 3.97%-yielder (note that it’s probably the best ETF to go for if you find a 4% yield to be the sweet spot that best balances dividends and appreciation), I do think complementing a large position in the SCHD with either “growthier” or higher-yielding names (think yields over 5%) for further customization can make a lot of sense.
If you’re a passive investor who’s fine with a hands-off, sleep-easy approach, you can stop at the SCHD. It has the yield, the lower beta (0.78 at writing, which makes for a smoother ride), and a strategy that factors in more than just yield. Dividend growth and return on equity are also traits that the SCHD favors, which, I think, may just give the far-pricier S&P a run for its money in the next three years.
In short, I still like the SCHD, even though it’s returned next to nothing year-to-date, and would stick with it if you’re in the market for something a bit safer (and more bountiful) than the S&P.
Amplify CWP Enhanced Dividend Income ETF
Amplify CWP Enhanced Dividend Income ETF (NYSEARCA:DIVO) is an intriguing, actively-managed ETF with a 4.8% yield and far less volatility than the broad market (0.70 beta, which is even lower than SCHD). The fund has an enviable five-star rating from Morningstar and for good reason.
Indeed, income investors may be less familiar with the ETF, which invests in dividend stocks while also implementing a covered call strategy. For an active fund with a covered call strategy, I find the 0.56% total expense ratio to be very reasonable.
Furthermore, I’m a huge fan of the top 10 components within the fund, which I find are capable of growth that could outpace the rest of the market. Indeed, the yield may be on the lower end as far as covered call (or premium income) ETFs are concerned. But if you want a covered call ETF that prioritizes growth and not just maxing out the yield at the expense of total returns, the DIVO is a fantastic pick that I think goes very well with the SCHD.
Main Street Capital Corporation
Finally, we have a standout stock in Main Street Capital (NYSE:MAIN), which is a rare breed in that it’s a stock that’s found a way to sustain a multi-year run despite boasting a massive 7.2% yield. Indeed, whenever you have a colossal yield alongside strong long-term share momentum, you have the formula for hefty total returns.
The mid-cap ($5.6 billion market cap) business development company offers debt and equity capital to various small businesses. With a proven management team that returns a great deal back to shareholders while still finding a way to move higher, I find MAIN shares to be the perfect cherry on top of any income-oriented portfolio.
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