3 Dividend-Paying ETFs to Buy in September Even If the S&P 500 Sells Off

We aren’t even through September, and the S&P 500 (^GSPC 0.47%) has already produced an 11.2% year-to-date total return (dividends included) at the time of this writing. That puts the index on track for its third consecutive year of higher-than-historical gains. Over the long term, the S&P 500 has averaged a 9% to 10% annualized total return.

Outsized gains have made the S&P 500 relatively expensive, putting pressure on companies to deliver on lofty expectations. Companies that sustain high earnings growth can certainly grow into their valuations over time. But at times like this, it’s especially important to make sure you are investing in high-conviction companies with solid fundamentals rather than ones that are full of hot air that’s waiting to compress at the slightest hint of trouble.

Another approach is to invest in exchange-traded funds (ETFs) that offer exposure to dozens, if not hundreds or even thousands of stocks. Many ETFs also offer dividends from the stocks they hold, which is an easy way to collect passive income.

Here’s why these Fool.com contributors believe that the Vanguard Dividend Appreciation ETF (VIG -0.01%), iShares Core Dividend Growth ETF (DGRO -0.12%), and the Global X S&P 500 Covered Call ETF (XYLD 0.05%) stand out as top ETFs to buy even if the S&P 500 sells off.

1. A low-cost ETF for growth investors seeking passive income

Daniel Foelber (Vanguard Dividend Appreciation ETF): The Vanguard Dividend Appreciation ETF is a long-term investment tool first and a passive income source second. Unlike funds that invest in low-growth companies with high yields, the Dividend-Appreciation ETF targets some of the top growth and value stocks around.

The objective is to focus on companies that can grow their earnings and their dividends over time rather than companies that fetch high yields right now. That’s why you’ll find over 16% of the fund invested in “Ten Titans” growth stocks like Microsoft (MSFT 1.01%), Apple, Broadcom (AVGO 1.17%), and Oracle, but not other well-known mega-cap growth stocks like Amazon (AMZN 1.42%) or Tesla that don’t pay dividends. Or why JPMorgan Chase is a top holding in the fund but not Berkshire Hathaway (BRK.A -0.47%) (BRK.B -0.47%). Berkshire is the largest financial stock by market cap, but it doesn’t pay a dividend because Warren Buffett has long believed that Berkshire can produce a higher total return over time by reinvesting profits rather than distributing them.

A company that pays dividends and regularly repurchases stock is inherently more balanced than a company like Amazon that pours profits back into its business and even dilutes its shareholders over time. Microsoft could grow much faster if it mirrored Amazon’s approach. Instead, it generates a ton of free cash flow and makes calculated bets that could pay off in the long run while also rewarding its shareholders by more than offsetting its stock-based compensation with buybacks.

Similarly, a key difference between Broadcom and Nvidia is that Broadcom steadily grows its dividend, with 15 consecutive years of dividend raises (often double-digit annual percentage increases). Broadcom is rapidly expanding its artificial intelligence (AI) revenue stream as demand for its custom XPU chips for data centers. But instead of betting the farm on this demand, Broadcom is staying disciplined by remaining committed to its dividend.

Microsoft and Broadcom have low yields because their stock prices have outpaced their dividend growth rates, not due to a lack of commitment to dividend raises. Many yield-focused ETFs would exclude these companies, but the Dividend Appreciation ETF is unique in that it doesn’t punish a company for having a low yield just because its stock has outperformed.

In this vein, the Dividend Appreciation ETF is ideally suited for investors who value dividend quality over quantity. The fund also sports a mere 0.05% expense ratio, which is just $5 for every $10,000 invested.

The Dividend Appreciation ETF would likely fall in line with the S&P 500, as it has high exposure to many of the top S&P 500 stocks. But its focus on quality is precisely why it’s the kind of fund that investors can be confident buying and holding even during times of uncertainty.

2. iShares Core Dividend Growth ETF is a great choice for ramping up your passive income

Scott Levine (iShares Core Dividend Growth ETF): If the prospect of the S&P 500 plunging lower in the coming weeks is keeping you from sleeping soundly, you’re not alone. It’s on many investors’ minds right now. As undesirable as a market downturn may be, though, the move to procuring more passive income through the iShares Core Dividend Growth ETF with its 2.1% dividend yield is a great way to help fortify your holdings — and drift off to dreamland after you count your sheep.

With 397 holdings, the iShares Core Dividend Growth ETF is chock-full of dividend stocks that are committed to raising their payouts and that represent various sectors. While financials make up the lion’s share of the fund (about 20%), information technology stocks and healthcare stocks also figure prominently in the fund with weightings of 18.6% and 16.9%, respectively. For investors interested in securing their portfolios, the fund’s diversification with respect to different sectors is highly desirable as it mitigates the risk of a downturn in a particular industry.

The fund includes a who’s who of industry leaders. Semiconductor stalwart Broadcom is the iShares Core Dividend Growth ETF is the largest holding, while tech peer Apple is the second-largest position. With the massive amounts of free cash flow that Broadcom and Apple are generating right now due to growth in AI, both companies have room to comfortably hike their payouts higher. The fund also includes companies that have long track records of increasingly rewarding shareholders. Johnson & Johnson, the third-largest holding, as well as Procter & Gamble, the ninth-largest holding, are both Dividend Kings — which are companies that have paid and raised their dividends for at least 50 years.

With a super low 0.08% expense ratio, investors have a low-cost opportunity to ramp up their passive income with a reliable dividend growth-focused ETF that’s worthy of loading up on right now.

3. An ETF offering a current distribution yield of 13.5%

Lee Samaha (Global X S&P 500 Covered Call ETF): Investors worried about a market sell-off, and who also have generating monthly income in mind, might want to take a look at some of the many ETFs available that offer access to a covered call strategy. It’s not an easy strategy for retail investors to replicate, and it can offer some security and income when markets are declining.

The Global X S&P 500 Covered Call ETF employs a strategy of buying the S&P 500 index and writing call options on it. Buying the index gives upside exposure to equities. The covered call strategy needs a bit more explaining.

A call option on an index gives the buyer the right to buy the index at a specified price (the strike price) within a specified time frame. It’s typically purchased by bullish investors who hope to buy the index at a price lower than its future value. Buyers pay a premium for the option. As such, a seller, or “writer,” of a call option (as the ETF effectively is in this case) will pick up a premium and is hoping the index won’t rise above the strike price so the option isn’t taken up.

By following the buy equities/sell call options strategy, the ETF is likely to underperform when markets are surging (as call option buyers will exercise their options), but outperform in flat or slightly up/down markets (call options won’t be taken up) or in down markets for the same reason.

It’s unlikely that the ETF will generate positive total returns in a downtrending market (the equities will decline). Still, it can do so in moderately up/down markets. In both cases, it offers a monthly income (with a trailing 12-month distribution yield of 13.5%), making it a good option for investors seeking a monthly income.