I want to become financially independent. My core strategy is to grow my passive income so that it will eventually cover my recurring expenses. To reach that goal, I'm taking a multipronged approach that includes investing in dividend stocks, exchange-traded funds (ETFs), and real estate.
I'm loading up on several dividend ETFs to grow my passive income, including JPMorgan Nasdaq Equity Premium ETF (NASDAQ: JEPQ), SPDR Portfolio High Yield Bond ETF (NYSEMKT: SPHY), and iShares Core U.S. Aggregate Bond ETF (NYSEMKT: AGG). Here's why I like this trio for passive income.
JPMorgan Nasdaq Equity Premium ETF takes a unique approach to generating income. The fund writes out-of-the-money call options on the Nasdaq-100 Index. That strategy generates options premium income each month that the ETF distributes to investors.
That income has really added up over the past year. The ETF's dividend yield over the last 12 months is 9.5%. That's a higher yield than U.S. high-yield junk bonds (7.9%) and the U.S. 10-year Treasury bond (4.4%). However, the payments do ebb and flow based on the options premium income the fund generates, which fluctuates with volatility.
In addition to income, this fund offers price appreciation potential. The ETF also holds a portfolio of stocks the managers select based on data science and fundamental research. The fund's price rises as that equity portfolio's value increases. Because of that, the fund offers the best of both worlds: high income and upside potential.
SPDR Portfolio High Yield Bond ETF provides exposure to the high-yield (junk) bond market. These bonds have sub-investment-grade bond ratings because the companies issuing this debt have weaker financial profiles. That puts these bonds at high risk of default.
This fund holds a large basket of these bonds (over 1,900) diversified across sectors, issuers, and maturity. That diversification helps reduce the default risk. If an issuer defaults on its bond, it won't have a major impact on the ETF. Meanwhile, even if a severe market downturn negatively impacted financially weaker companies, the overall diversification of the fund should help mute the impact on ETF investors.
Investors get paid well to assume the higher risk profile of these bonds. The fund has a distribution yield currently above 7%. While the monthly distribution payments fluctuate based on interest payments received, the fund offers a relatively steady passive income stream.
The iShares Core U.S. Aggregate Bond ETF focuses on the other side of the bond market: investment-grade bonds. These bonds have a lower risk of defaulting, making them ideal for those seeking a very low-risk income stream.