I aspire to retire early, not because I dislike my job—quite the opposite, in fact. I genuinely enjoy my work and intend to continue for as long as I can. However, the pressure of having to earn money to sustain my lifestyle is something I’d prefer to avoid. My current focus is on achieving financial independence, allowing me the option to retire early if I choose.
A key component of my approach is generating passive income, with the objective of reaching a point where it fully covers my everyday expenditures. I’ve discovered that exchange-traded funds (ETFs) can serve as excellent investments for passive income. Consequently, I frequently invest in ETFs known for their high dividend yields. This September, there are three high-yielding ETFs that I’m particularly eager to acquire more of.
Contents
JPMorgan Equity Premium Income ETF
The JPMorgan Equity Premium Income ETF (0.48%) is designed to provide investors with monthly income distributions while also offering exposure to equity markets with reduced volatility. Essentially, it aims to deliver a bond-like income stream with the potential for growth.
True to its purpose, this dividend-focused ETF has an impressive track record. Its most recent payment resulted in an annualized income yield of 6.9%, and over the past year, its dividend yield stood at 7.6%. This is comparable to high-yield junk bonds, which yield 7.9%, and significantly surpasses other income-focused investments such as real estate investment trusts (4.4%) and the 10-year U.S. Treasury Bond (4.4%).
The ETF’s generous income stream is achieved through a dual strategy: it invests in a defensive portfolio of high-quality stocks, selected based on proprietary rankings, and writes out-of-the-money call options on the S&P 500 index. Essentially, the ETF hedges its stock holdings by betting that the S&P 500 will not exceed a certain price by a specific date. This approach generates options premium income, distributed monthly to investors.
Combining these strategies, the fund offers passive income and growth potential with reduced volatility, making it an ideal addition to my portfolio.
The iShares 0-3 Month Treasury Bond ETF (0.05%) focuses on short-term U.S. Treasury bills (T-bills) with maturities of three months or less. These short-term T-bills carry minimal risk, often regarded as “risk-free” investments, while offering an attractive income yield, currently around 5.2%.
This ETF serves as an excellent option for holding idle cash. Many brokerage accounts, including mine, offer low yields on cash balances. For investors like me, who prefer maintaining a substantial cash position, this results in missed opportunities in the present high-interest-rate environment.
By investing a significant portion of my idle cash in the iShares 0-3 Month Treasury Bond ETF, I can generate incremental passive income. The fund provides monthly cash distributions, which I can reinvest in this ETF or allocate to other income-generating investments. Its high liquidity also allows for the easy sale of shares when cash is needed for other investments.
SPDR Portfolio High Yield Bond ETF
The SPDR Portfolio High Yield Bond ETF provides exposure to the expansive and profitable junk bond market. U.S. high-yield debt represents a market exceeding $1 trillion, offering higher yields than investment-grade bonds to compensate for their increased default risk. Over the past year, this ETF’s distribution yield has averaged 7.7%.
While high-yield bonds come with greater risk, this ETF mitigates some of that through diversification. It currently holds over 1,925 bonds from issuers across various sectors, with consumer cyclical companies representing the largest share at 20.5%. Diversifying across issuers and sectors helps reduce default risk.
The SPDR Portfolio High Yield Bond ETF makes monthly distribution payments, which may vary with interest rates and economic conditions. Nonetheless, it can generate more income than ETFs focusing on investment-grade corporate bonds, such as the iShares iBoxx $ Investment Grade Corporate Bond ETF. It’s a suitable choice for investors looking to enhance income from a portion of their fixed-income portfolio.
Bolstering My Passive Income
I am convinced that passive income is my pathway to financial freedom. Therefore, each month, I allocate a portion of my active earnings to investments that generate passive income, such as high-yielding ETFs. This strategy facilitates the growth of my passive income over time, bringing me incrementally closer to my goal of achieving financial independence.
