2 High-Yielding ETFs That You Can Rely on for Recurring Income

Key Points

• Exchange-traded funds can be appealing options for income investors as they offer great diversification.

• The Schwab U.S. Dividend Equity ETF and iShares Core High Dividend ETF both pay a dividend yield of over 3%.

• Both funds have dozens of stocks in their portfolios and their expense ratios are less than 0.1%.

• 10 stocks we like better than Schwab U.S. Dividend Equity ETF ›

Generating recurring income for your portfolio can be a great way to grow its value and provide you with a way to generate cash flow without having to sell stocks. You can then use that money to pay bills, pad your savings, or even have it reinvested back into stocks.

What's important when investing in income-generating investments is picking ones that you can safely rely on. Chasing high yields can lead to trouble later on if those payouts don't prove to be sustainable. In some cases, it's just bad luck where a dividend stock you've invested in ran into challenges that it couldn't get itself out of, and it had no choice but to reduce its payout.

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Some risk is unavoidable when you're investing in individual stocks. And that's why, if your goal is to generate safe recurring income, you may want to consider investing in exchange-traded funds (ETFs) that can provide you with an easy way to diversify. Two ETFs that can be ideal options in this case are the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) and iShares Core High Dividend ETF (NYSEMKT: HDV). They both pay above-average dividends and can be excellent investments to hang onto for years.

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Schwab U.S. Dividend Equity ETF

The Schwab U.S. Dividend Equity ETF promises investors a straightforward investing strategy that prioritizes things such as low costs, fundamental strength, and quality and safety when it comes to dividends. Those are essential items to consider when investing in dividend stocks. And at 0.06%, its expense ratio does indeed make it a low-cost fund, which makes it suitable for long-term investing; its fees won't put a big dent in your overall returns, even over several years.

With 103 holdings as of Aug. 5, the fund isn't overly diversified, and there are much larger ETFs. But what makes the Schwab fund ideal for income investors is its focus on quality stocks with good fundamentals. It isn't simply investing in a wide range of dividend stocks; the ETF carefully selects safe stocks, with many of them being high-yielding investments that pay more than the S&P 500 average of 1.2%.

Big-name stocks such as Merck, Verizon Communications, and PepsiCo are among its top holdings. By focusing on such high-yielding stocks, the ETF is able to average an overall yield of around 3.9%. That's exceptional, given the diversification you're getting with the fund.

In the past 12 months, the ETF is down over 1% but when including its dividend, its total return is positive and above 2%. And in five years, its total returns are north of 70%.

iShares Core High Dividend ETF

Another solid ETF to add to your portfolio can be the iShares Core High Dividend ETF. This fund is even more selective in its portfolio as it focuses on 75 of the best high-dividend stocks.

There will be some overlap with the Schwab fund, but one key difference is that in the Schwab ETF, the largest holding accounted for approximately 4.3% of the portfolio's weight, whereas in the iShares Core High Dividend fund, there are multiple stocks above that threshold. The top three stocks in this ETF -- ExxonMobil (8.5%), Johnson & Johnson (6.7%), and AbbVie (5.8%) -- account for a combined 21%.

So you get a bit less diversification with the fund and more of a position in its largest holdings, which isn't necessarily a bad thing. It's just important to be aware of the stocks you have the most exposure to, to ensure that you're comfortable with them.

The fund's expense ratio is 0.08%, which is comparable to the other fund on this list. Its yield of 3.5% is a bit smaller, but it's still a high payout overall. The bulk of its portfolio is allocated to sectors that have a great deal of long-term stability: healthcare, energy, and consumer staples. Collectively, those sectors represent 64% of all the stocks within the ETF.

This year, as investors have been seeking out safe stocks, the iShares ETF has rallied 6% in value, and with its dividend, the total return is nearly 8%.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbbVie and Merck. The Motley Fool recommends Johnson & Johnson and Verizon Communications. The Motley Fool has a disclosure policy.