2 High-Yield Dividend ETFs Passive Income Lovers Should Buy Now

When it comes to producing high-yielding dividend income, investors often look to traditional value stocks that fall into one of two categories: Dividend Aristocrats and Dividend Kings. Historically, these have been solid investments regardless of market cycles or macroeconomic factors.

But the growing popularity of exchange-traded funds, or ETFs, over the past two decades has led to an expanding list of viable alternatives for investors focused on producing significant and reliable passive income through the market. Whether these ETFs are actively or passively managed, a number of them are able to provide better return, broader exposure and relative safety through diversification compared to their counterparts in Dividend Aristocrat or Dividend King stocks.

In fact, according to Kiplinger, the recent surge in ETF offerings has resulted in these funds now overseeing more than $8 trillion in assets under management (AUM).

And with more than 3,100 ETFs offered in the U.S. alone, many funds have emerged that offer yield-hungry investors a dividend-paying alternative to individual legacy stocks. Two in particular have caught the eye of such investors, the actively managed JPMorgan Equity Premium Income ETF (NYSE: JEPI ) and the passively managed Schwab US Dividend Equity ETF (NYSE: SCHD ).

Why these 2 ETFs are great for income

Both JEPI and SCHD aim to provide income investors with access to reliable returns, with the former ETF making monthly distributions to shareholders and the latter making quarterly distributions. As an actively managed fund, JEPI uses a covered call strategy on its shares to generate a healthy payout. According to JPMorgan’s website, the fund “delivered an attractive 12-month rolling dividend yield of 7.55% and a 30-day SEC yield of 6.88%.” Both figures beat the returns of other asset classes such as global real estate investment trusts (4.40%), US 10-year bonds (4.40%) and US stocks (1.3%).

SCHD, meanwhile, aims to track as closely as possible “the total return of the Dow Jones US Dividend 100 Index. As a passively managed fund, its strategy is quite simple: The ETF invests in stocks that are chosen based on their fundamental strength in relative to their peers and paying healthy dividend yields to shareholders. SCHD has a 12-month distribution yield of 3.34%, with a 30-day SEC yield of 3.63%.

What is JEPI?

JEPI is an income-focused ETF offered by JPMorgan Chase & Co. The fund was established on May 20, 2020 and over the past four years has produced admirable passive income for investors based on the holdings and the covered call strategy, growing it. AUM during that period at about $36 billion. Because JEPI uses an options strategy to boost its distributions, it falls into the derivative income category, for which Morningstar rates it four stars out of a possible five out of 74 peer funds in that group as of May 31, 2024.

The ETF’s holdings are US large-cap stocks, providing shareholders with a well-diversified portfolio of companies that experience low volatility. As a result, not only does JEPI have substance monthly dividend yield, but is able to replicate much of the returns of the S&P 500 index.

JEPI’s top 10 stocks include:

• Trane Technologies PLC (NYSE: TT)
• Progressive Corp. (NYSE: PGR)
• Meta Platforms Inc. (NASDAQ: META)
• Southern Co. (NYSE: SO)
• Mastercard Inc. (NYSE:MA)
• AbbVie Inc. (NYSE: ABBV)
• Amazon.com Inc. (NASDAQ: AMZN)
• ServiceNow Inc. (NYSE: NOW)
• NVIDIA Corp. (NASDAQ: NVDA)
• Lowe’s Cos Inc. (NYSE: LOW)

What is SCHD?

SCHD is also an income-focused ETF, although its track record is nearly a decade longer than JEPI’s. Offered by Charles Schwab, the fund was established on October 20, 2011, and over the past 13 years, AUM has grown to $62 billion. The fund also receives a four-star rating from Morningstar in the high value category.

Similar to JEPI, SCHD’s holdings are US large-cap stocks, providing shareholders with a well-diversified portfolio of companies that experience low volatility. However, unlike JEPI, SCHD is passively managed and does not rely on a derivatives strategy to boost its quarterly dividend distributions. Instead, seeking to mirror the Dow Jones US Dividend 100, its holdings focus on value stocks in inelastic market sectors that have demonstrated a history of dividend growth – some of which are members of the aforementioned exclusive Dividend Aristocrats and Dividend Kings groups above.

SCHD’s top 10 holdings by weighting include:

• Home Depot Inc. (NYSE: HD) – 4.44%, $2.7 billion
• Bristol Myers Squibb (NYSE: BMY) – 4.26%, $2.6 billion
• BlackRock Inc. (NYSE: BLK) – 4.22%, $2.6 billion
• Verizon Communications Inc. (NYSE: VZ) – 4.22%, $2.6 billion
• Chevron Corp. (NYSE: CVX) – 4.18%, $2.6 billion
• Cisco Systems Inc. (NASDAQ: CSCO) – 4.15%, $2.6 billion
• Lockheed Martin Corp. (NYSE: LMT) – 4.14%, $2.6 billion
• Pfizer Inc. (NYSE: PFE) – 3.92%, $2.4 billion
• AbbVie Inc. (NYSE: ABBV) – 3.90%, $2.4 billion
• Texas Instruments Inc. (NASDAQ: TXN) – 3.88%, $2.4 billion

Comparing spending rates

Expense rates—or the fees for operating, managing, and marketing an ETF—can vary based on a number of factors. Actively managed ETFs generally have higher expense ratios, ranging from 0.05% to 1% on average, while passively managed ETFs that mirror benchmarks bear lower expenses, with ratios of expenses ranging on average from 0.05% to 0.3%.

This is the case of JEPI and SCHD. JEPI, with its actively managed portfolio and options-based strategy, currently shows an expense ratio of 0.35%, meaning that for every $100 invested, the shareholder will pay 35 cents annually. SCHD, on the other hand, is passively managed and comes in at a significantly lower expense ratio of 0.06%, meaning for every $100 invested, the shareholder will pay 6 cents annually.

As a general rule, investors should be wary of expense ratios that exceed 1%, as they can erode overall returns over time.

Historical performances

Both funds focus on generating income, but that hasn’t stopped them from seeing the stock appreciate over the years. In the first half of this year, both ETFs posted slight gains, with JEPI up 13.5% year-to-date (YTD) and SCHD up 14% YTD.

Looking further, SCHD is up 24% over the past year, 13% annualized over the past five and 13.3% annualized since its debut in October 2011. JEPI is up 20% over the past year and 13.3% annualized in the last five meetings. back to its beginnings.

However, because of their holdings and strategies, the two ETFs have performed admirably in the 2022 bear market, even outperforming the market when JEPI managed to fall just 12.90%, while SCHD fell by 7.48%. For context, that year the S&P 500 lost 17.79%, the Nasdaq Composite fell 29.92%, and the Nasdaq 100 – which tracks the 100 largest non-financial companies listed on the Nasdaq – fell 29.84%.

One year price targets

Currently trading at $59.15 per share, 120 Wall Street analysts give JEPI a one-year average price target of $63.61 per share, with a high-end target of $72.75 and a low target of $53.19. Given the current share price, the average price target represents a potential gain of 7% for investors over the current price.

Based on the consensus of 101 analysts, SCHD has a one-year average price target of $88.87 per share, with a high-end target of $104 and a low-end target of $74. At the time of writing, SCHD shares are trading at $84.65, meaning the average price target represents a 5% upside potential.

The Big Takeaway

For investors focused on generating passive income, high-yield dividend ETFs like JEPI and SCHD offer substantial, market-beating distributions while providing portfolio exposure to broad market sectors. During economic downturns, both funds have proven capable of beating the market, and their respective operating expenses ensure that fees will not materially erode returns.

While SCHD historically offers slightly higher stock appreciation, JEPI’s monthly return is noteworthy and beats the distributions of most dividend-paying stocks. However, either ETF would make a solid addition to a portfolio looking to produce income through holdings that are able to withstand the next correction or bear market.

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