Two High-Yield Dividend Exchange-Traded Funds Worth Investing in for Passive Income Generation
When discussing dividend investing strategies beyond picking individual stocks, there are some effective methods. However, the question is, which dividend ETFs are the top picks for your portfolio in 2025?
My strategy, as we approach 2025, involves focusing on a downtrodden sector with notable upcoming opportunities and investing in stocks with a proven history of consistent dividend growth. Let me introduce you to two outstanding ETFs to help you accomplish this:
Could this sector be the leading performer in a declining interest rate environment?
The real estate sector faced significant challenges during the 2022 bear market and even continued to struggle in 2023 as other sectors recovered. The primary reason for this underperformance is the high sensitivity of real estate investment trusts (REITs) to interest rates.
To avoid complicated economic explanations, I'll keep it simple: income-focused investments like REITs have yields that tend to move in the same direction as risk-free interest rates; the 10-year Treasury yield being a reliable benchmark. With the Federal Reserve finally beginning to lower benchmark interest rates, it could serve as a catalyst for real estate outperformance over the next few years.
One investment option is the Vanguard Real Estate ETF (VNQ 1.31%), which has a dividend yield of approximately 3.8% and tracks a weighted index of REITs. Top holdings include warehouse powerhouse Prologis (PLD 1.31%), American Tower (AMT 0.84%), which owns countless cell towers, and data center king Equinix (EQIX 1.67%), which could benefit significantly from AI tailwinds.
The highest yield may not always be the optimally high yield
While a higher dividend yield is preferable to a lower one in a perfect scenario, if you're a patient investor, dividend stocks with strong histories of dividend growth tend to maintain their dividend increases and produce substantial total returns. And that's why the Vanguard Dividend Appreciation ETF (VIG 0.66%) should pique your interest.
This ETF tracks a weighted index of 338 stocks, which are large-cap stocks boasting a track record of growing their dividends annually. Plenty of the fund's top-weighted stocks may not be what you'd expect to find in a dividend ETF. For instance, top-weighted stocks include tech titans Apple (AAPL -0.20%), Broadcom (AVGO 0.25%), and Microsoft (MSFT 1.14%).
So, don't disregard this ETF just because its 1.7% yield appears to be rather modest. First, consider that due to the nature of the fund, your dividend payments are likely to grow at a quick pace over time. Second, this ETF has delivered 12% annualized total returns over the past decade, surpassing the 10% annualized returns of the Vanguard High Dividend Yield ETF (VYM 0.69%). In summary, the Vanguard Dividend Appreciation ETF can provide you with a strong mix of passive income and growth potential.
Two unique ETFs
The ideal choice for you depends on your investment approach, objectives, and risk tolerance. For example, if you rely on your portfolio for current income, the higher yield from the real estate ETF may outweigh the long-term growth potential of the appreciation-focused ETF. On the other hand, if you still have several decades until retirement, dividend growers with a proven track record might seem more appealing.
In the context of your investment strategy, considering the potential for real estate outperformance in a declining interest rate environment, investing in the Vanguard Real Estate ETF (VNQ) could be beneficial due to its high dividend yield and top holdings like Prologis (PLD), American Tower (AMT), and Equinix (EQIX).
Regarding the long-term growth potential of your portfolio, the Vanguard Dividend Appreciation ETF (VIG) might be an optimal choice due to its track record of annual dividend increases and strong total returns, despite a lower starting yield compared to other dividend ETFs.
