3 Great High-Yield ETFs for Decades of Passive Income

Source The Motley Fool

The Global X Super Dividend U.S. ETF (NYSEMKT: DIV), the JPMorgan Equity Premium Income ETF (NYSEMKT: JEPI), and the Vanguard Total Corporate Bond ETF (NASDAQ: VTC) are excellent options for investors looking for monthly income. These three dividends generate an average dividend yield of 5.7% and offer a relatively safe way to get exposure to higher-quality U.S. assets, including large-cap equities and investment-grade corporate bonds.

These three ETFs are valuable additions to the portfolios of risk-averse investors. Each ETF has different characteristics, but all three perform regardless of the broader market conditions.

1. Global X Super Dividend U.S. ETF: Dividend yield 6.1%

I'll start with the easiest-to-understand ETF. Currently yielding 6.1% and paying monthly distributions, the Global X ETF invests in 50 of the top-yielding stocks in the U.S. However, it's not a purely mechanical process, as the ETF's managers use a methodology to look for so-called "low-beta" stocks to try to generate low-volatility returns.

In plain English, low-beta stocks have statistically demonstrated lower volatility than the index, usually the S&P 500. They are seen as less risky, both on the downside and the upside. Still, income-seeking investors won't worry so much about the latter, as their priority is usually the surety of the dividend income.

Looking into the ETF's holdings, it's no surprise to see utilities well represented, with 19.5% of holdings, real estate investment trusts (REITs) at 18.8%, and consumer staples at 11.3%. The high-yielding energy sector is well represented, at 19.9% of holdings. There's hardly any exposure to more cyclical sectors like information technology and industrials.

As such, it's reasonable to expect this ETF to underperform when the technology sector is hot and the energy sector is weak. Moreover, it's likely to underperform in strong bull markets.

Still, as evidence of the benefit of its low-volatility strategy, here's a look at total returns in 2022 when the S&P 500 declined significantly.

DIV Total Return Level Chart

DIV Total Return Level data by YCharts

2. The JPMorgan Equity Premium Income ETF: Dividend yield 7%

Speaking of low-volatility returns, this JPMorgan ETF has it as a key aim of its strategy. Up to 80% of the ETF is allocated toward equities management considers generating returns. This is an actively managed strategy, so you are investing in the stock-picking abilities of its managers.

Interestingly, the ETF's prospectus states, "The Fund may receive income to the extent it invests in equity securities of companies that pay dividends; however, securities are not selected based on anticipated dividend payments.

As such, you should not consider the equity part of the strategy similar to the yield-chasing strategy of the Global X ETF. That's a plus if you want to avoid the unintentional sector biases (for example, overweight energy, underweight technology) that occur with the Global X ETF and other high-yield equity ETFs.

The ETF invests up to 20% of its assets in financial instruments that act as selling call options on the S&P 500. When buying an S&P 500 call option, an investor pays a premium for the right to buy the index at a specified price (the strike price) in the future. It's a bullish strategy because the investor hopes the index will go up in price so that they can buy the index at the strike price and pocket the difference between the current price at the strike price, minus the premium.

It follows that the seller of the call option will lose money if the index rises sharply. However, the seller of the call option (the strategy that the ETF is following) will pocket the premium if the S&P 500 declines or doesn't rise enough above the strike price.

As such, the ETF option strategy makes money when markets are declining or generating moderate returns, helping offset the decline in its equity portfolio. On the other hand, when equity markets are rising sharply, the options strategy will lose money and negatively offset the gains on the equity side.

This idea is to benefit from the upside of equities, but with reduced low volatility, while generating income to make monthly distributions.

3. Vanguard Total Corporate Bond ETF: Dividend yield 4.1%

Corporate bonds tend to do well when interest rates are falling and badly when rates rise. The reason is simple: As the risk-free rate (government-backed bonds) rises, investors will demand more yield from corporate bonds to compensate for the extra risk, meaning bond yields go up and prices go down.

This ETF only invests in investment-grade corporate bonds and is a relatively low-risk bond ETF. According to Fitch, about 45% of its assets are in A-rated bonds, 8.4% in AA or above, and more than 47% in BBB bonds -- those classified as investment grade, with a low risk of default. These are high-quality assets.

As such, the risk in this ETF is mainly in a scenario where interest rates are rising. Alternatively, the ETF will do well when interest rates are falling (as they are now). All the while, investors can pick up a decent monthly income.

All told, these three ETFs provide excellent income across a range of market conditions and are worth considering as additions to a diversified portfolio.

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Lee Samaha 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.

Disclaimer: For information purposes only. Past performance is not indicative of future results.
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