If I Could Buy Only 1 High-Yield Dividend ETF for Passive Income in September, This Would Be It

Key Points

• The SPDR Portfolio S&P 500 High Dividend ETF invests in high-yielding S&P 500 companies.

• It has very different sector weightings than the S&P 500.

• With interest rates dropping, investors will likely clamor for high dividend yields to produce income.

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Earning income from your investments can prove fruitful in building wealth. And you don't have to start with a lot of money to receive passive income; you can start small and build up your positions over time.

With the Federal Reserve recently cutting short-term interest rates and indicating further reductions are due over the next couple of years, getting high interest rates from vehicles like savings accounts has become more challenging.

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Given the lower-rate environment, dividends from stocks should play a larger role in your passive-income portfolio. You can accomplish this with exchange-traded funds (ETFs). Investing in a portfolio of equities allows you to achieve diversification, while ETFs also provide the liquidity of a stock since they trade throughout the day.

However, you shouldn't get fooled into thinking that you'll have no work to do. You still have to choose the right ETF. Given the current interest rate environment and potential for volatile market conditions, the SPDR Portfolio S&P 500 High Dividend ETF (NYSEMKT: SPYD) should top your list of candidates if you're looking for passive income.

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What does the ETF invest in?

The SPDR Portfolio S&P 500 High Dividend ETF tracks the S&P 500 High Dividend Index, which consists of 80 stocks with high yields. Interestingly, the index assigns equal weight to each stock rather than weighting by market capitalization.

The ETF has its largest investment in the real estate sector, with a 22.4% allocation. Other major sector allocations include consumer staples (16.7%), financials (15.5%), utilities (12.9%), and heathcare (8%).

By comparison, the SPDR S&P 500 ETF Trust, which tracks the S&P 500, has a very different sector allocation. The portfolio has the largest amount invested in the information technology sector at 34.6%. That's followed by financials (13.6%), consumer discretionary (10.5%), communication services (10.4%), and healthcare (8.8%).

As you might expect, the differing sector weighting results in different yields. The SPDR S&P 500 High Dividend ETF has a 4.7% yield, while the SPDR S&P 500 ETF Trust yields 1.1%.

A low fee structure

The SPDR Portfolio S&P 500 High Dividend ETF invests passively. That means it can charge low fees since it doesn't have to pay a lot of money to run the fund, including to portfolio managers.

The ETF has an expense ratio of 0.07%. That's how much it costs to run the fund, and it reduces your return. All else equal, the lower the expense ratio, the better the return to investors.

A 0.07% expense ratio means that for every $100 invested, the fund subtracts just seven cents. That's even better than many equity index ETFs, which had an average expense ratio of 0.14% in 2024, according to the Investment Company Institute.

Risk and return

Over the last five years through Aug. 31, the SPDR Portfolio S&P 500 High Dividend ETF returned an annualized 14.8%. By comparison, the S&P 500 ETF produced a 14.6% return during this time.

However, the underlying S&P 500 High Yield Index had higher volatility at 18.2%, versus 16% for the S&P 500. Hence, during this period, the latter produced a better risk-adjusted return, as measured by the Sharpe ratio.

But given each index's composition, the falling interest rate environment, and the SPDR Portfolio S&P 500 High Dividend ETF's focus on dividend-paying stocks, it looks poised to produce strong returns and lower volatility compared to the S&P 500.

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Lawrence Rothman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.