3 Dividend ETFs That Could Generate Thousands of Dollars in Passive Income

Generating thousands of dollars in annual passive income from dividend ETFs doesn't require a lottery-winning portfolio. It requires the right combination of yield, growth, and time.

Three exchange-traded funds (ETFs) can collectively deliver substantial passive income from an investment that most working Americans can realistically build over a decade. Each is built on a different income-generation strategy, but they all could generate thousands of dollars in passive income.

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1. Schwab U.S. Dividend Equity ETF

The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is the most powerful income compounder in the group. Its dividend yield of 3.2% is lower than those of the other two funds on our list, but this ETF has more than doubled its payout over the last 10 years.

An investor with $100,000 could put one-third of the initial amount in the Schwab U.S. Dividend Equity ETF and generate annual income of roughly $1,067. With the ETF's track record, the passive income is likely to climb steadily over the years.

The key to the Schwab U.S. Dividend Equity ETF's success is its underlying methodology. The ETF tracks the Dow Jones U.S. Dividend 100 Index. This index screens for 10 consecutive years of dividend payments, strong free cash flow relative to debt, return on equity, and five-year dividend growth rate. Those filters systematically eliminate dividend traps and concentrate the portfolio in businesses that have proven they can sustain and grow their payouts through recessions, rate cycles, and market downturns.

This methodology is working great in the current environment. The Schwab U.S. Dividend Equity ETF is up 27% year to date, easily outperforming the S&P 500 (SNPINDEX: ^GSPC). It has performed well over the long term, too, with average annual total returns of 13% since its inception in 2011.

2. JPMorgan Nasdaq Equity Premium Income ETF

If you're seeking to maximize your passive income, check out the JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ: JEPQ). This fund currently has a 30-day SEC yield of 11.5%. Investing $33,333 in this ultra-high-yield ETF would make you around $3,833 over 12 months at that rate.

The trade-off for getting such a high yield is that it can fluctuate significantly. That's to be expected with a fund that writes covered call options to supplement its dividend income -- and especially one that holds highly volatile Nasdaq-100 stocks and sells calls against a portion of its portfolio.

This approach has worked well over time, though. The JPMorgan Nasdaq Equity Premium Income ETF has delivered an average annual total return of 15.2% since its inception in May 2022. Over the past three years, its average total return has been an even more impressive 20%.

There are two other important things to know about this ETF. First, it's best to own the JPMorgan Nasdaq Equity Premium Income ETF in an IRA or 401(k) instead of a taxable brokerage account because its distributions are classified as ordinary income and taxed at a higher rate than qualified dividends. Second, its annual expense ratio of 0.35% is higher than most index ETFs.

3. Goldman Sachs S&P 500 Core Premium Income ETF

The Goldman Sachs S&P 500 Core Premium Income ETF (NASDAQ: GPIX) could offer a "Goldilocks" alternative for many passive income investors. The fund is positioned squarely between the Schwab U.S. Dividend Equity ETF's growth-oriented income and the JPMorgan Nasdaq Equity Premium Income ETF's maximum-yield approach. It pays a monthly dividend with a yield of roughly 8.2% over the last 12 months. Investing $33,333 in this ETF would generate annual income of $2,733 at that rate.

What distinguishes the Goldman Sachs S&P 500 Core Premium Income ETF from traditional covered-call ETFs is its partial-overwrite strategy. Rather than writing options against 100% of its equity portfolio (which caps virtually all upside), the ETF writes calls on only 25% to 75% of its holdings. Goldman's active managers adjust the coverage ratio dynamically -- a flexibility that rules-based competitors don't have.

The results of this approach speak for themselves. The Goldman Sachs S&P 500 Core Premium Income ETF has achieved average annual total returns of 21.3% since its inception in October 2023.

Easy passive income

Combined, $33,333 in each of these three dividend ETFs generates approximately $7,633 annually -- or $636 per month.

These three funds also complement each other structurally. The Schwab U.S. Dividend Equity ETF provides income growth and defensive positioning. The JPMorgan Nasdaq Equity Premium Income ETF provides maximum current yield. The Goldman Sachs S&P 500 Core Premium Income ETF provides the balance between meaningful income and S&P 500 participation.

Thousands of dollars in annual passive income from ETFs doesn't require a complex strategy. Investors can generate solid income by buying these three funds.

Keith Speights has positions in Goldman Sachs ETF Trust-Goldman Sachs S&P 500 Premium Income ETF and JPMorgan Nasdaq Equity Premium Income ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.