2 High-Yield Dividend ETFs to Buy for Passive Income

In today's low-interest-rate environment, investors are increasingly turning to dividend-paying exchange-traded funds (ETFs) to generate passive income. Two standout options are the Vanguard High Dividend Yield ETF (VYM) and the iShares Preferred and Income Securities ETF (PFF). Let's delve into the sector allocations, top holdings, and other factors that make these ETFs attractive for income-seeking investors.

VYM and PFF offer high dividend yields through strategic sector allocations and top holdings. VYM focuses on common stocks with higher-than-average yields, currently around 2.7%, by investing in sectors like Financials (23.6%), Industrials (16.5%), and Consumer Staples (12.7%). Its top holdings include Broadcom (4.4%), JPMorgan Chase (3.6%), and ExxonMobil (3%), which contribute to its high yield. PFF, with a yield of around 6%, holds preferred stocks and hybrid securities, primarily from Financials (75%), Industrials (16%), and Utilities (10%). Its top holdings, such as Wells Fargo, Citigroup, and JPMorgan, provide a stable, higher-yielding income stream.

Interest rate changes significantly impact the dividend yields of VYM and PFF. For VYM, which focuses on common stocks with higher-than-average dividend yields, interest rate changes have a lesser direct impact. However, as interest rates rise, investors may shift funds from dividend stocks to bonds, potentially reducing demand and lowering VYM's price, which could slightly increase its dividend yield. Conversely, falling interest rates may attract investors back to dividend stocks, potentially increasing VYM's price and slightly lowering its dividend yield. For PFF, which holds preferred stocks and hybrid securities, interest rate changes have a more direct impact. As interest rates rise, the values of PFF's holdings tend to decline, which increases the income yield. This is because preferred stocks have higher risk profiles than bonds, and their higher yields compensate investors for taking on that greater risk. Conversely, falling interest rates may increase the values of PFF's holdings, potentially decreasing its dividend yield.

The expense ratios and distribution frequencies of VYM and PFF significantly impact their appeal as passive income investments. VYM has a lower expense ratio of 0.06%, making it more cost-effective for investors. Its quarterly distribution frequency provides a steady income stream, with an annual yield of around 2.7%. PFF, on the other hand, has a higher expense ratio of 0.46% and distributes income monthly, with an annual yield of around 6%. While PFF offers a higher yield, its higher expense ratio and monthly distribution frequency may not be as appealing to investors seeking a more stable and lower-cost passive income source.

VYM and PFF have shown strong historical performance and dividend growth. VYM, with a 2.7% yield, has outperformed the S&P 500's 1.2% yield, generating $27 vs. $12 in annual dividend income per $1,000 investment. PFF, with a 6% yield, offers a higher, relatively stable income stream. Both ETFs have increased their distributions over time, with VYM's price trending higher consistently. While past performance is not indicative of future results, their higher concentration in high-quality, high-yielding dividend stocks bodes well for future income growth.

In conclusion, VYM and PFF are attractive options for investors seeking passive income through dividend-paying ETFs. Their strategic sector allocations, top holdings, and historical performance make them strong contenders in the income-generating ETF landscape. However, investors should consider their individual risk tolerance, investment goals, and time horizons when deciding which ETFs to include in their portfolios.