Maximizing Passive Income: A Strategic Comparison of Two High-Yield Dividend ETFs for 2025

The High-Yield Dilemma: KBWY vs. SCHD in 2025

For income-focused investors, the allure of high dividend yields is undeniable. However, the sustainability of those yields—and the broader implications for portfolio resilience—demands a closer look. In 2025, two ETFs stand out as polar opposites in strategy and risk profile: the Invesco KBW Premium Yield Equity REIT ETF (KBWY) and the Schwab U.S. Dividend Equity ETF (SCHD). This analysis evaluates their strengths and weaknesses through the lenses of dividend sustainability, yield potential, and portfolio diversification.

Dividend Sustainability: High Yield vs. Earnings Coverage

KBWY’s 9.28% yield [1] is among the most attractive in the market, but it comes with a critical caveat: the fund’s payout ratio is widely regarded as unsustainable. Analysts have repeatedly flagged that KBWY’s dividends are not supported by its earnings, with the ETF relying on aggressive leverage and REIT-specific accounting practices to maintain payouts [2]. This creates a high risk of dividend cuts, particularly in a rising interest rate environment where REITs often struggle.

In contrast, SCHD’s 3.67% yield [3] appears modest but is underpinned by a disciplined approach. The ETF focuses on U.S. companies with strong balance sheets, consistent earnings growth, and a history of raising dividends. Its 5-year dividend growth rate of 7.6% annually [4] suggests a sustainable income stream, even if the yield is lower. As stated by Morningstar, SCHD’s emphasis on “quality over yield” makes it a safer bet for long-term investors [5].

Yield Potential: Short-Term Gains vs. Long-Term Stability

While KBWY’s yield is tempting, its performance metrics tell a different story. The ETF has delivered a 10-year annualized return of just 4.38% [6], lagging behind SCHD’s 11.24% [7]. This disparity highlights a key trade-off: KBWY prioritizes immediate income at the expense of capital appreciation, whereas SCHD balances yield with growth.

Moreover, KBWY’s volatility is a red flag. With a maximum drawdown of -58.63% compared to SCHD’s -33.37% [8], the REIT-focused ETF is far more susceptible to market corrections. For retirees or conservative investors, this volatility could erode principal and undermine the goal of passive income.

Portfolio Diversification: Sector Concentration vs. Broad Exposure

KBWY’s heavy weighting in real estate investment trusts (REITs) [9] introduces sector-specific risks. REITs are sensitive to interest rates, property values, and economic cycles, making them less diversified than a broad-market ETF. While this concentration boosts yield, it also amplifies downside risk during downturns.

SCHD, by contrast, offers a more diversified approach. It tracks the Dow Jones U.S. Dividend 100™ Index, which includes companies across industries such as healthcare, technology, and consumer staples [10]. This broad exposure reduces sector-specific vulnerabilities and aligns with the principle of diversification, a cornerstone of long-term portfolio resilience.

Conclusion: Strategic Allocation for Passive Income

For investors prioritizing high yield, KBWY remains a compelling option—but only as a small, tactical allocation. Its 9.28% yield [1] is unmatched, but the risks of dividend cuts and volatility necessitate caution. Conversely, SCHD’s 3.67% yield [3] may seem modest, but its combination of earnings coverage, low expense ratios (0.06% vs. KBWY’s 1.24% [11]), and diversified holdings make it a superior choice for most passive income strategies.

Ultimately, the decision hinges on risk tolerance and investment horizon. Those seeking immediate income might allocate a small portion to KBWY, while prioritizing SCHD for long-term stability. As always, diversification and regular portfolio rebalancing remain essential to navigating the uncertainties of 2025 and beyond.

Source:
[1] 7 Top High-Dividend ETFs by Yield for September 2025 [https://www.nerdwallet.com/article/investing/high-dividend-etfs]
[2] KBWY: Continued Risk For Dividend Cuts And Share Price Decline [https://seekingalpha.com/article/4699898-kbwy-continued-risk-for-dividend-cuts-and-share-price-decline]
[3] 2 High-Yield Dividend ETFs You Can Buy With $200 in ..., [https://www.fool.com/investing/2025/09/05/2-high-yield-dividend-etfs-you-can-buy-with-in-sep/]
[4] The Top High-Dividend ETFs for Passive Income in 2025 [https://www.morningstar.com/funds/top-high-dividend-etfs-passive-income-2025]
[5] KBWD vs. SCHD — ETF Comparison Tool [https://portfolioslab.com/tools/stock-comparison/KBWD/SCHD]
[6] KBWD vs. SCHD — ETF Comparison Tool [https://portfolioslab.com/tools/stock-comparison/KBWD/SCHD]
[7] Top 5 best Dividend ETFs for January 2025 [https://beatmarket.com/blog/top-5-dividend-etf/]
[8] KBWD vs. SCHD — ETF Comparison Tool [https://portfolioslab.com/tools/stock-comparison/KBWD/SCHD]
[9] 7 Top High-Dividend ETFs by Yield for September 2025 [https://www.nerdwallet.com/article/investing/high-dividend-etfs]
[10] SCHD | Schwab U.S. Dividend Equity ETF [https://www.schwabassetmanagement.com/products/schd]
[11] KBWD vs. SCHD — ETF Comparison Tool [https://portfolioslab.com/tools/stock-comparison/KBWD/SCHD]