My Top High-Yield ETF to Buy Before the End of the Year (and It's Not Even Close)

There are two primary ways to generate income from stocks -- capital gains and dividend income. Investors who are primarily targeting potential capital gains may favor growth stocks that don't pay dividends but have theoretically unlimited upside potential. Bonds and Treasury Bills (T-bills), by contrast, provide higher yielding passive income.

Investing in high-yield dividend stocks or dividend-paying exchange-traded funds (ETFs) can offer the best of both worlds through potential capital gains and a steady stream of passive income. It's an ideal strategy for someone with a risk tolerance high enough to invest in equities over bonds or T-Bills.

Here's why the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) stands out as my top ETF for income investors to buy now.

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A passive income investor's dream come true

The Schwab U.S. Dividend Equity ETF checks all the boxes that risk-averse passive investors are likely considering when searching for a high-yield ETF. The ETF has been around for 14 years and is backed by a reputable financial services firm: Charles Schwab. With over $71 billion in net assets, it has grown to become one of the largest high-yield ETFs out there.

This is especially true among low-cost funds, as this ETF has an expense ratio of just 0.06% -- or just $0.06 for every $100 invested. Low expense ratios ensure that investors aren't overpaying for an ETF's benefits. ETFs with high expense ratios can be replicated with individual stock holdings, especially in today's age of fractional shares, which makes it fairly easy to mimic an ETF's holdings for any portfolio size.

The Schwab U.S. Dividend Equity ETF pays quarterly dividends and has a 3.8% 30-day SEC yield. For context, the 10-year Treasury rate is 4.2%. This means that investors are getting nearly as much passive income as the risk-free rate, while still being able to get exposure to the potential gains (and losses) from the stock market.

To top it all off, the fund sports a price-to-earnings (P/E) ratio of just 16.5. That's significantly lower than the S&P 500 P/E ratio of 30.8, making the fund ideally suited for value investors.

A fund built around stodgy, value-focused sectors

The fund targets large-cap, high-yield stocks. Around 90% of the ETF is invested in companies with market caps larger than $15 billion. No individual holding exceeds 5% of the fund, which may appeal to investors seeking significant diversification.

Over half of the ETF is invested in just three sectors -- energy, consumer staples, and healthcare -- because many leading companies in these sectors prioritize dividend growth.

For example, top energy holdings include integrated major Chevron, exploration and production powerhouses ConocoPhillips and EOG Resources, oilfield services giant SLB, midstream mammoth ONEOK, and downstream dynamo Valero Energy. By holding industry-leading positions across the oil and gas value chain, the ETF effectively manages risk, ensuring that no single position has a significant effect on its results.

Similarly, the top four healthcare holdings in the fund -- Merck, Amgen, Bristol Myers Squibb, and AbbVie -- have high yields and valuations ranging from dirt cheap to reasonable.

The five largest consumer staples holdings in the fund are PepsiCo, Coca-Cola, Altria Group, Target, and Kimberly-Clark, all of which have high yields. These five stocks are so reliable that they have raised their dividends for over 50 consecutive years, making them Dividend Kings.

Passive income at a compelling value

The Schwab U.S. Dividend Equity ETF is a perfect fit for investors looking for income stocks at a reasonable valuation. It can serve as a foundational holding in a value-focused portfolio, or help balance a portfolio that has become heavily concentrated in growth stocks due to recent market gains.

While many investors may be drawn to the Schwab U.S. Dividend Equity ETF for its dividend yield, the fund has also generated substantial capital gains. It's more than tripled in value since its inception in October 2011.

In this vein, the Schwab U.S. Dividend Equity ETF can be an excellent tool for compounding wealth over time while generating quality passive income that can be used in retirement, another financial planning purpose, or even to invest in other stocks.

Charles Schwab is an advertising partner of Motley Fool Money. Daniel Foelber has positions in Kimberly Clark, Schwab U.S. Dividend Equity ETF, and Target and has the following options: short December 2025 $100 calls on Target. The Motley Fool has positions in and recommends AbbVie, Amgen, Bristol Myers Squibb, Chevron, Merck, and Target. The Motley Fool recommends Charles Schwab, ConocoPhillips, EOG Resources, and Oneok and recommends the following options: short December 2025 $95 calls on Charles Schwab. The Motley Fool has a disclosure policy.