2 Dividend ETFs to Buy Hand Over Fist and 1 to Avoid

Investors trying to generate income from their portfolios have a host of options at their disposal today. Exchange-traded funds (ETFs) can be particularly powerful tools, allowing dividend lovers to generate income while still keeping their investing lives relatively simple. However, you must select ETFs just as carefully as you would stocks.

YieldMax Ultra Option Income Strategy ETF's (NYSEMKT: ULTY) shockingly high 65% yield comes with a very big drawback. A better option for most investors would be Vanguard High Dividend Yield ETF (NYSEMKT: VYM) or, if you like the premise but not the results of the YieldMax fund, Amplify CWP Enhanced Dividend Income ETF (NYSEMKT: DIVO). Here's a look at all three.

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The problem with YieldMax Ultra Option Income Strategy ETF

A 65% yield should be enticing to anyone who appreciates dividend income. With a yield like that, you could generate $65,000 a year with a $100,000 investment. If that sounds too good to be true, well, it is. YieldMax Ultra Option Income Strategy ETF is an option-focused exchange-traded fund that simply hasn't lived up to the hype.

The ETF's plan is to generate income by selling options. Options trading is a fairly complex niche of Wall Street that most investors probably shouldn't handle on their own. However, the 65% yield on offer from YieldMax Ultra Option Income Strategy ETF is a bit of an illusion, as the dividend is variable and depends on the results of the options trading being conducted.

That 65% yield is based on the annualization of the most recent dividend. The weekly dividend has ranged from as high as $0.58 per share to as low as $0.06 (rounded up to the nearest penny). Unless you can handle some big income swings, this probably isn't a good choice for your income portfolio.

There's another small problem to consider. The share price of YieldMax Ultra Option Income Strategy ETF has declined 80% since its inception. So, you are generating a huge income stream from the dividend, but the value of your capital has been in steady decline. In fact, at the time of this writing, the ETF's website lists its cumulative return since inception as negative 0.98%. Essentially, investors have just gotten their capital back.

That's not a great outcome for most dividend investors, who are likely looking for a stable-to-growing dividend backed by growing businesses. There are better ETF options for dividend lovers -- they just come with lower, though perhaps more realistic, yields.

Vanguard High Dividend Yield ETF

If your preference is to build a broad index-based portfolio, then Vanguard High Dividend Yield ETF will be right up your alley. Essentially, the ETF takes all of the dividend-paying stocks that trade in the U.S. market and ranks them by yield. It then buys the highest yielding 50% of the list, using a market cap weighting. In one trade, you've bought all of the high yield stocks, and the cost is a tiny expense ratio of 0.06%.

As with any investment, there are some trade-offs to consider. For example, the inclusion of over 560 stocks in the portfolio provided diversification, but it also requires moving pretty far down the yield spectrum. The ETF's yield is a modest 2.4%. Sure, that's more than twice the yield of the S&P 500 index, but it may be a little light for some income seekers.

That said, what's interesting here is that the dividend and share price of this ETF have both headed generally higher over time. All in, it could be a solid alternative to an S&P 500 index ETF for investors who are looking for broad-based equity exposure.

Amplify CWP Enhanced Dividend Income ETF

Amplify CWP Enhanced Dividend Income ETF falls somewhere in between the two ETFs mentioned above. This ETF is an actively managed portfolio of around 25 to 30 dividend-paying stocks on which covered call options are strategically written to generate additional income.

Selling covered calls is a fairly low-risk options strategy. The stock selection process basically boils down to buying good companies that appear to have attractive business prospects and reasonable valuations. However, as an actively managed fund, the managers can essentially do as they please.

That said, the strategic covered call selling amps up the income component. The dividend yield is currently around 4.5%. That will likely fall within an attractive range for most dividend investors. While the options strategy means that the monthly dividend will be variable over time, it has been fairly consistent overall.

Unlike the YieldMax ETF, however, the value of Amplify CWP Enhanced Dividend Income ETF has generally increased over time. The expense ratio is a bit high at 0.56%, but you get an attractive income stream while your capital continues to grow.

Don't get stuck on the yield

If all you consider is yield without understanding how it is generated, you are setting yourself up for disappointment. That's the likely outcome if you invest in YieldMax Ultra Option Income Strategy ETF with its shockingly high 65% yield.

A better buy-and-hold option for investors looking for reliable income would be Vanguard High Dividend Yield ETF's diversified approach or, if you can handle a little more complexity, Amplify CWP Enhanced Dividend Income ETF.

Reuben Gregg Brewer has positions in Amplify ETF Trust-Amplify Cwp Enhanced Dividend Income ETF. The Motley Fool has positions in and recommends Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.