3 Passive Income ETFs Worth Holding for the Long Haul

Written by James Brumley for The Motley Fool->

Value stocks have been out of favor while the advent of AI made many growth stocks must-have holdings. That’s changing now.

Past dividend growth doesn’t guarantee future dividend growth, but it sure suggests it’s likely.

So-called “buy-write” funds that sell covered calls generate amazing (if inconsistent) dividend payments.

Are you looking to build an income portfolio you can simply set up and forget about for a long time without needing to check in on it regularly? A collection of dividend-paying exchange-traded funds (ETFs) will do the trick nicely. You won't even need that many. Here's a closer look at three that could be enough on their own.

If there's only room for one income ETF in your portfolio right now, start with the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD).

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If you happen to keep tabs on the relative performance of exchange-traded funds, you may know that this one has suspiciously lagged the S&P 500 (SNPINDEX: ^GSPC) and its tradeable counterpart SPDR S&P 500 ETF Trust (NYSEMKT: SPY) since early 2023, even after factoring in the dividend payments it made in the meantime.

Don't be deterred. There's nothing wrong with it. It's built to mirror the performance of the Dow Jones U.S. Dividend 100™ Index, which prioritizes holding only the highest-yielding stocks with the very best fundamentals. It doesn't own any of the names like Nvidia, Amazon, or Microsoft that have led the market of late with oversized performances.

For reference, the Schwab U.S. Dividend Equity ETF's top holdings right now are boring names like Procter & Gamble, Merck, and Home Depot -- quality stocks in their own right, but clearly not the AI stocks that have been the market's must-haves. Rather, this fund's value holdings have simply continued cranking out dividends without any fanfare.

As the old adage goes, though, nothing lasts forever. The same economic underpinnings that allowed growth and technology stocks to shine for so long are finally starting to shift as we move into the latter stages of an economic growth cycle. Generally speaking, this shift favors value stocks. The reliable income they generate is a nice add-on for investors during these periods, when there's not as much opportunity for capital gains.

Newcomers will be plugging into SCHD while its trailing dividend yield stands at a respectable 3.3%.

Income investors obviously prefer higher dividend yields, but there's more to the story, particularly if you're going to be sticking with an investment for the long haul. Dividend growth also matters.

Enter the ProShares S&P 500 Dividend Aristocrats ETF (NYSEMKT: NOBL). (The term Dividend Aristocrats® is a registered trademark of Standard & Poor's Financial Services LLC.)

As the name suggests, this fund holds stakes in the 69 companies that have raised their per-share dividend payment every year for at least the past 25 years, although several have done so for far longer. This track record is evidence of their operational resiliency even through tough economic periods -- resiliency that tends to persist once companies prove they've got it.

Interested investors might balk at this ETF's current yield of just over 2%. It's not terrible, but it's not great either.

Look at the bigger picture. NOBL's quarterly per-share payment has grown by nearly 40% in just the past five years, and almost doubled in less than a decade. Based on this track record, the effective yield on an investment made in this ETF today may be much higher than the dividend yields you might be able to plug into in the future. The key is just being patient enough to leave it alone in the meantime.

NOBL's top holdings right now are West Pharmaceutical Services, Franklin Resources, and AbbVie.

Finally, add the Neos Nasdaq-100 High Income ETF (NASDAQ: QQQI) to your list of exchange-traded funds you can feel good about buying and holding for the long haul.

It's a somewhat unusual investment, in that it's built around the Nasdaq-100 index, which isn't exactly known for dividends. QQQI still generates good income by selling covered calls on the stocks it owns. You may have also heard these ETFs referred to as "buy-write" funds, meaning they buy stocks, and then sell -- or "write" -- call options against their ordinary equity positions. This selling generates recurring income that's then passed along to shareholders.

It can be very good income, too. This fund's annualized yield stands right around 14%.

It sounds almost too good to be true, so what's the catch? There's no "catch" in the usual sense of the term. There's just an arguable drawback. That is, this fund generally underperforms the Nasdaq-100 during bullish periods. Selling covered calls means you're forced to also sell some of your stock holdings on the way up, when you'd normally choose to remain in these positions.

Still, this buy-write portfolio also tends to outperform during downturns, and even when the market is flat, again because that's just how covered calls work. Even if you underperform the Nasdaq-100 benchmark in the long run, you're still doing pretty well simply because this particular fund typically holds stakes in the market's highest-growth names.

Just know that this ETF's dividend payment isn't terribly consistent... another attribute of the buy-write strategy. That's why you probably wouldn't want to make it a foundational first or even second holding of an income portfolio. It can really pack a punch as a third or fourth income position, though.

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James Brumley has positions in Procter & Gamble. The Motley Fool has positions in and recommends AbbVie, Amazon, Home Depot, Merck, Microsoft, Nvidia, and ProShares S&P 500 Dividend Aristocrats® ETF. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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