Two High-Yield Dividend ETFs for Generating Passive Income

Dividend investing offers a great way to make your money work for you without the hassle of selecting individual stocks. If you're considering dividend exchange-traded funds (ETFs) for your portfolio, it's essential to identify which ones stand out.

As we approach 2025, I am enhancing my portfolio by targeting an underperforming sector with significant future potential and by selecting stocks that have a strong track record of dividend growth. Below are two exceptional ETFs to consider for investment.

Will This Sector Shine in a Lower Interest Rate Environment?

Real estate has recently struggled, being one of the worst-performing sectors during the 2022 bear market and showing continued weakness in 2023, despite gains in other areas. A key factor affecting real estate investment trusts (REITs) is their sensitivity to interest rates.

To avoid a lengthy economics discussion, it’s important to note that income-driven investments like REITs tend to have dividend yields that correlate closely with risk-free interest rates, such as the yield on 10-year Treasuries. With the Federal Reserve starting to cut interest rates, this could trigger a strong recovery for real estate investments in the coming years.

One notable option for exposure to this sector is the Vanguard Real Estate ETF (VNQ), which boasts a dividend yield of around 3.8% while tracking a diversified index of REITs. Some of its major holdings include Prologis (PLD), a leading warehouse operator; American Tower (AMT), which owns a vast number of cell towers; and Equinix (EQIX), a company likely to benefit from the rise of AI technology.

A Higher Yield is Not Always the Best Choice

While it generally makes sense to prefer higher dividend yields, it's important to remember that the best long-term dividend stocks are not always those with the highest yields. Stocks with a solid history of increasing dividends tend to not only maintain but also expand their payouts over time. This is where the Vanguard Dividend Appreciation ETF (VIG) shines.

This ETF tracks a diverse index comprising 338 large-cap stocks that have consistently increased their dividends each year. Many of its top holdings, like Apple (AAPL), Broadcom (AVGO), and Microsoft (MSFT), might not be the typical stocks you'd associate with a dividend fund.

Don't overlook this ETF simply because its yield is about 1.7%, which might seem low at first glance. Keep in mind that its unique approach is likely to result in rapidly increasing dividend payments over time. Additionally, it has delivered impressive annualized total returns of 12% over the past decade, surpassing the approximately 10% of the Vanguard High Dividend Yield ETF (VYM). Thus, the Vanguard Dividend Appreciation ETF provides a compelling mix of passive income and growth.

Choosing the Right ETF for You

Deciding which ETF is right for your investment strategy depends on various factors, including your investment goals, risk appetite, and whether you need immediate income. If you depend on your investment for current income, the higher yield of the Vanguard Real Estate ETF may be more attractive. Conversely, if you have a longer time frame until retirement, focusing on stocks with a strong potential for dividend growth may be more suitable.

Overall, both ETFs provide valuable options for generating passive income, each appealing to different investor preferences and needs.

dividend, ETFs, realestate