Stocks-Related Passive Income Alternatives Outperform S&P 500 Index Funds' 1.2% Yield. Discover Three Strategies.
Investing in the S&P 500 might not yield the highest dividends due to the prevalence of tech companies with low yields or no dividends at all. But fear not, there are ways to boost your passive income from stocks without straying far from this popular index. Here are three strategies to consider:
1. Low-cost Dividend ETFs
S&P 500 index funds and ETFs provide a hassle-free way to tap into the stock market. Vanguard's S&P 500 ETF, for instance, boasts a minuscule expense ratio of 0.03%. And even if you invest $100,000, your annual fees will only amount to $30.
While you'll never outperform the index on a relative basis, Vanguard offers a range of low-cost ETFs that focus on value and income. For instance, the Vanguard High Dividend Yield ETF has a diversified portfolio of 530 stocks and a decent yield of 2.7%. And with an expense ratio of just 0.06%, it's a smart choice for income-focused investors.
Some of the stocks in this ETF, like JPMorgan Chase, ExxonMobil, Procter & Gamble, and Home Depot, may lack the latest tech innovations. However, they've got the earning power and resilience to raise their dividends over time.
Are value stocks your thing? Then take a look at the Vanguard Value ETF. It has an impressive 330-stock portfolio, an expense ratio of only 0.04%, and specializes in large-cap value stocks. Top holdings include Berkshire Hathaway and other value picks with desirable yields and growth potential.
2. High-Yield Stocks with Risk
Stocks with high dividend yields can generate significant passive income. But they often come with higher risks.
Take United Parcel Service (UPS) for example. With a yield of 4.9%, it has been a reliable income source. But, it's currently grappling with lower margins and slowing revenue growth. While its dividend has increased by 59.8% over the past four years, its stock price has dropped by 37.2%. If UPS continues to struggle, it might not be able to offer substantial dividend increases or maintain its payout.
Similarly, Dow and LyondellBasell have seen their stock prices nosedive as a result of sluggish global growth and increased competition. Their yields of 6.8% and 6.9%, respectively, could entice investors, but neither company has a perfect track record of consistently boosting its dividend. The financial health of both companies might be compromised if the downturn persists, forcing them to consider debt or cutting their dividends.
3. Dividend Kings: Stability and Growth
Companies that have grown their dividends without interruption for 50 consecutive years are known as Dividend Kings. These stable, well-established companies--such as Coca-Cola, PepsiCo, and Procter & Gamble--can offer dependable income and solid long-term growth.
Although some high-yield stocks may seem more attractive, you'll often find better quality in Dividend Kings like Illinois Tool Works, American States Water, and other lesser-known gems. These businesses have performed well despite market fluctuations, and they often yield more than 3%.
Divide and Conquer: Using Dividends for Financial Success
When it comes to dividend stocks, it's essential to remember that the reliability of the payout depends on the strength of the underlying company. Thus, prioritize assessing the quality of the company and its business model over focusing purely on the dividend yield.
While growth stocks have historically outperformed dividend and value stocks, they come with higher risks. Over long periods, dividend stocks can be a valuable addition to your portfolio, providing steady income starting from retirement to complementing your financial plan.
In the S&P 500, you'll likely find tech companies with low or no dividends causing the overall yield to drop. However, there are alternatives to improve your passive income. By searching for high-yield dividend stocks or investing in low-cost, dividend-focused ETFs, you can optimize your income potential in this popular index.
Investing in low-cost dividend ETFs, such as Vanguard's S&P 500 ETF, can help boost passive income from stocks without compromising on the popular S&P 500 index. Despite having a lower yield compared to some high-yield stocks, these ETFs offer diversification and lower fees, making them a smart choice for income-focused investors.
Furthermore, diversifying your portfolio with Dividend Kings can provide both stability and growth. These companies, like Coca-Cola and Procter & Gamble, have a consistent track record of growing their dividends for 50 consecutive years, offering dependable income and solid long-term growth. By prioritizing the quality of the company and its business model, you can potentially enhance your financial success with dividend stocks.
