All It Takes Is $7,000 Invested in Each of These 5 High-Yield ETFs to Help Generate Over $2,000 in Passive Income Per Year

Dividend stocks and exchange-traded funds (ETFs) don’t look all that appealing when the S&P 500 is making a new all-time high seemingly every week. However, folks who want to implement a passive income strategy to achieve a long-term financial goal may find high-yield ETFs an excellent choice for investing in the market without having the total return solely depend on stock prices going up.

After accounting for immediate and near-term expenses if you’re wondering how to invest your savings, then investing $7,000 into each of the following ETFs could help you generate over $2,000 in passive dividend income per year. Here’s what makes each fund stand out as a top buy now.

Vanguard High Dividend Yield ETF

The Vanguard High Dividend Yield ETF (VYM -0.13%) fund has outsize exposure to value and income-focused stock market sectors like financials, consumer staples, utilities, and energy. However, it also includes some dividend-paying growth stocks like Broadcom.

Broadcom’s meteoric rise in recent years has vaulted it to the top holding in the ETF. Broadcom has become one of the hottest artificial intelligence (AI) stocks due to its custom AI chips for hyperscalers. But unlike some growth stocks that don’t pay dividends, Broadcom is highly committed to its payout, boosting it for 15 consecutive years (often with annual double-digit percentage raises).

Instead of focusing solely on yield, the Vanguard High Dividend Yield ETF prioritizes dividend quality over quantity. This is why it includes Walmart as a top holding. Walmart may yield just 0.9%, but it has 52 consecutive years of raising its payout and has crushed the S&P 500 over the last three years.

With a 0.06% expense ratio and 2.5% yield, the Vanguard High Dividend Yield ETF is a good choice for investors looking for more passive income than the S&P 500’s mere 1.2% yield, but with an emphasis on companies with track records of growing their earnings and payouts rather than yield alone.

Vanguard Energy ETF

The Vanguard Energy ETF (VDE -1.39%) mirrors the performance of the energy sector. Many oil and gas companies, especially the integrated majors, midstream, and downstream ones, pass along a portion of profits to shareholders via dividends. Dividends from reliable energy stocks offer a way to generate steady passive income regardless of oil and gas prices. However, there are many examples of energy companies taking on too much leverage and then cutting their payouts. So targeting quality companies is paramount.

The Vanguard Energy ETF achieves its 3.1% yield by investing in over 100 energy stocks. However, 39% of the fund is invested in ExxonMobil and Chevron — the two U.S. integrated majors — with another 6% in ConocoPhillips, one of the highest-quality U.S. upstream players. Concentration risk would normally be a red flag. But in the energy sector, building an ETF around these high-quality players is a good thing, especially considering ExxonMobil and Chevron have increased their dividends for 42 and 38 consecutive years, respectively.

The fund features a low expense ratio of just 0.09%.

Schwab U.S. Dividend Equity ETF

The Schwab U.S. Dividend Equity ETF (SCHD -0.38%) is basically a more yield-focused version of the Vanguard High Dividend Yield ETF. Instead of mixing in some growth-focused companies like Broadcom, this ETF leans into companies with high yields. Over half of its holdings are in the energy, consumer staples, and healthcare sectors.

By investing in high-yield companies from dividend-focused sectors, the ETF sports a 3.7% yield without capping upside potential.

The fund features a low expense ratio at just 0.06%.

JPMorgan Equity Premium ETFs

The two Vanguard ETFs and the Schwab U.S. Dividend Equity ETF achieve their yields from investing in dividend-paying companies. The JPMorgan Equity Premium ETF (JEPI -0.12%) and JPMorgan Nasdaq Equity Premium ETF (JEPQ 0.25%) are fundamentally different. The former holds equity in S&P 500 stocks, and the latter focuses on the Nasdaq-100. These ETFs use a combination of covered calls and equity-linked notes (ELNs) to generate income at the expense of capping upside potential.

For investors focused on generating passive income that exceeds returns from bonds or Treasury bills instead of seeking major stock market profits, the trade-off is worth it.

Of course, nothing is free in financial markets. The income generated from covered calls and ELNs helps protect against some, but not all, downside risk. Which is why both ETFs underwent sell-offs in April, although these were not as severe as for the S&P 500 and Nasdaq-100.

The JPMorgan Nasdaq Equity Premium ETF yields 11.1%, exceeding the 8.4% of the JPMorgan Equity Premium ETF, thanks to the Nasdaq-100’s higher volatility. As a result, the former commands higher call premiums.

In summary, these ETFs are ideally suited for investors who are willing to take on a bit more risk in exchange for a higher yield than bonds. However, because both funds are actively managed, they have higher expense ratios of 0.35%. Due to active management and market conditions, their yields can fluctuate (usually by a percentage point or two). Still, these funds stand out as excellent ways to generate income, especially for investors who are nervous about buying stocks at all-time highs. And unlike most ETFs, these two funds pay monthly rather than quarterly distributions.