2 High-Yield Dividend ETFs to Buy to Generate Passive Income

There are simple and complex ways to generate income. If you buy exchange-traded funds (ETFs), you can hand over a lot of the work, mixing simple and complex strategies as you look to build your income portfolio. On the “simple” side of the equation, a great option is Schwab US Dividend Equity ETF (SHD 1.43%). On the “complex” side, you might consider writing covered calls Amplify CWP Enhanced Dividend Income ETF (DIVO 0.85%).

Here’s a quick look at these two ETFs.

1. Schwab US Dividend Equity ETF: High quality and high yield

The Schwab US Dividend Equity ETF begins its stock screening process by limiting itself to those companies that have increased dividends for at least 10 years. Real estate investment trusts (REITs) are excluded from consideration. This approach inherently focuses the selection process on financially strong businesses. This, however, is only the first cut to create the pool from which the ETF selects its final portfolio of 100 stocks.

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The next step takes things much deeper, as this dividend stock ETF creates a composite score for each potential investment. The score compares cash flow to total debt, which highlights financial strength. It analyzes return on equity, which identifies companies that produce strong results. It ranks each company’s five-year dividend growth rate, which highlights both financial strength and earnings growth potential. And then add the dividend yield. Stocks ranked in the top 100 end up in the portfolio, weighted by market capitalization.

All in all, the Schwab US Dividend Equity ETF is a good way to focus your portfolio on high-yielding, financially strong companies without having to do all the work yourself. The ETF charges an expense ratio of just 0.06% for all of this activity and offers a trailing dividend yield of about 3.4%. You can get higher-yielding dividend ETFs, but the added emphasis on quality here sets it apart from the Schwab US Dividend Equity ETF.

2. Amplify CWP Enhanced Dividend Income ETF: How to make covered calls

The Amplify CWP Enhanced Dividend Income ETF uses a much more aggressive approach: covered calls. Only experienced investors should try their hand at covered calls, which can be quite difficult to work with. Or you can hire someone else to generate covered call income for you, which is what the Amplify CWP Enhanced Dividend Income ETF offers.

There are some ETFs that handle covered calls programmatically, which is fine. But that’s not how most investors would go about selling covered calls if they were to do it themselves. (A covered call gives the buyer the right, but not the obligation, to buy shares in the future.) The Amplify CWP Enhanced Dividend Income ETF takes a different approach, actively building a portfolio and selectively selling covered calls against the portfolio.

There’s no formula to explain the stock selection process here, other than the Amplify CWP Enhanced Dividend Income ETF tends to buy high-quality dividend stocks. Management then looks to strategically sell covered calls on the stock it owns. The goal is to generate income from covered calls in a way that creates attractive risk-adjusted total returns over time. The trailing dividend yield is 4.5% today.

The only downside here is the cost, as the ETF has a fairly high expense ratio of around 0.56%. However, given the practical nature of the approach, this is not surprising or strange. And you have to balance the cost against the fact that the ETF can provide you with an attractive monthly income stream to see you through in retirement — without having to do all the extra work of selling covered calls yourself.

A strong pair of income-producing ETFs

If you are a conservative investor, the obvious choice here would be the Schwab US Dividend Equity ETF. It has a clear approach that focuses on blending quality and performance. For more aggressive types, adding the Amplify CWP Enhanced Dividend Income ETF can add a bit more yield with an approach that would mimic what you would do if you were trying to sell covered calls yourself. Taken together, this pair would provide a solid, low-effort foundation for your portfolio.