Generating Passive Income with Dividend-Paying ETFs and Stocks

I like the idea of letting money work for me on its own. One way to do that is buying equities that generate dividends. Last year, about 10% of our gains are from dividends, capital gains, and interests. Since long-term qualified dividends are taxed at a much lower rate (at most 15%) than short-term capital gains and interest, it makes sense to add them to our portfolio, even outside the tax deferred accounts.

To begin this topic, let’s see what dividend is. According to Investopedia, dividend is

Distribution of a portion of a company’s earnings, decided by the board of directors, to a class of its shareholders. The dividend is most often quoted in terms of the dollar amount each share receives (i.e. dividends per share or DPS). It can also be quoted in terms of a percent of the current market price, referred to as dividend yield.

To invest in companies that pay dividends, we can choose either to buy individual stocks, or purchase a mutual fund or ETF that invest in dividend-paying companies. Here, I will only look at ETFs with the main objective as generating incomes from dividend distributions. Using Morningstar’s ETF tool, I found the following 12 dividend-paying ETFs that invest in domestic companies.

Name ER(%) Yield(%) YTD(%) 3-yr(%)
iShares Dow Jones Select Dividend Index (DVY) 0.40 3.02 6.79 15.85
PowerShares HighYield Dividend Achievers (PEY) 0.61 3.02 -0.03 9.91*
PowerShares Dividend Achievers (PFM) 0.67 1.78 4.42 14.40
First Trust Value Line Dividend Index (FVD) 0.70 3.95 6.36 23.02
WisdomTree LargeCap Dividend (DLN) 0.28 N/A 6.97 5.46**
WisdomTree Dividend Top 100 (DTN) 0.38 N/A N/A 3.91**
WisdomTree SmallCap Dividend (DES) 0.38 N/A N/A -1.03
WisdomTree Total Dividend (DTD) 0.38 N/A 7.01 3.06**
WisdomTree MidCap Dividend (DON) 0.38 N/A N/A 2.36
SPDR S&P Dividend (SDY) 0.30 2.78 6.52 17.44*
Vanguard Dividend Appreciation ETF (VIG) 0.27 1.27 5.97 13.13*
Vanguard High Dividend Yield Indx ETF (VYM) 0.25 2.90 6.50 5.58**

* 1-year return
** 3-month return

The top 10 holdings of the 12 dividend-paying ETFs are listed as follows (with annual dividend payout amount and yield). The reason I look at the individual stocks of each ETF are 1) to get a sense of the yield of the ETF that hold them could be when such data is not available (for those WisdomTree ETFS in particular), 2) see how much these ETFs overlap, and, 3) most importantly, to identify which stocks these ETFs are using to generate dividends so I can use them for my own purpose.

iShares Dow Jones Select Dividend Index (DVY)

  1. Altria Group (MO) — $3.44 (5.00%)
  2. FPL Group (FPL) — $1.64 (2.60%)
  3. FirstEnergy (FE) — $2.00 (2.90%)
  4. Bank of America (BAC) — $2.24 (4.40%)
  5. Merck (MRK) — $1.52 (2.90%)
  6. DTE Energy (DTE) — $2.12 (4.10%)
  7. PNC Financial Services Group (PNC) — $2.52 (3.30%)
  8. Pinnacle West Capital (PNW) — $2.10 (4.30%)
  9. AT&T (T) — $1.42 (3.60%)
  10. Regions Financial (RF) — $1.44 (4.00%)

PowerShares HighYield Dividend Achievers (PEY)

  1. First Commonwealth Financial (FCF) — $0.68 (6.00%)
  2. FirstMerit (FMER) — $1.16 (5.30%)
  3. Corus Bankshares (CORS) — $1.00 (6.10%)
  4. F.N.B. (FNB) — $0.94 (5.50%)
  5. Washington Mutual (WM) — $2.20 (5.10%)
  6. Progress Energy (PGN) — $2.44 (4.70%)
  7. Old National Bancorp (OND) — $0.88 (4.80%)
  8. Pfizer (PFE) — $1.16 (4.30%)
  9. U.S. Bancorp (USB) — $1.60 (4.60%)
  10. Consolidated Edison (ED) — $2.32 (4.50%)

PowerShares Dividend Achievers (PFM)

  1. General Electric (GE) — $1.12 (3.00%)
  2. Exxon Mobil (XOM) — $1.40 (1.70%)
  3. Citigroup (C) — $2.16 (4.00%)
  4. AT&T (T) — $1.42 (3.60%)
  5. Bank of America (BAC) — $2.24 (4.40%)
  6. Wal-Mart Stores (WMT) — $0.88 (1.80%)
  7. Procter & Gamble (PG) — $1.40 (2.30%)
  8. Pfizer (PFE) — $1.16 (4.30%)
  9. American International Group (AIG) — $0.66 (1.00%)
  10. Johnson & Johnson (JNJ) — $1.66 (2.60%)

First Trust Value Line Dividend Index (FVD)

  1. Northwest Natural Gas (NWN) — $1.42 (2.70%)
  2. Interactive Data (IDC) — $0.50 (1.70%)
  3. Snap-On (SNA) — $1.08 (2.00%)
  4. Honeywell International (HON) — $1.00 (1.80%)
  5. Masco (MAS) — $0.92 (3.00%)
  6. 3M (MMM) — $1.92 (2.30%)
  7. XL Capital (XL) — $1.52 (1.90%)
  8. General Electric (GE) — $1.12 (3.00%)
  9. New Jersey Resources (NJR) — $1.52 (2.80%)
  10. The New York Times (Class A) (NYT) — $0.92 (3.60%)

WisdomTree LargeCap Dividend Fund (DLN)

  1. General Electric (GE) — $1.12 (3.00%)
  2. Citigroup (C) — $2.16 (4.00%)
  3. Bank of America (BAC) — $2.24 (4.40%)
  4. AT&T (T) — $1.42 (3.60%)
  5. Exxon Mobil (XOM) — $1.40 (1.70%)
  6. Pfizer (PFE) — $1.16 (4.30%)
  7. Altria group (MO) — $3.44 (5.00%)
  8. Verizon Communications (VZ) — $1.62 (4.00%)
  9. JPMorgan Chase (JPM) — $1.52 (2.90%)
  10. Chevron (CVX) — $2.32 (3.00%)

WisdomTree Dividend Top 100 (DTN)

  1. Southern Copper (PCU) — $6.00 (7.00%)
  2. AT&T (T) — $1.42 (3.60%)
  3. Bristol-Myers Squibb (BMY) — $1.12 (3.70%)
  4. Embarq (EQ) — $2.50 (3.90%)
  5. Southern Company (SO) — $1.61 (4.30%)
  6. Progress Energy (PGN) — $2.44 (4.70%)
  7. Verizon Communications (VZ) — $1.62 (4.00%)
  8. Consolidated Edison (ED) — $2.32 (4.50%)
  9. Mattel (MAT) — $0.65 (2.30%)
  10. DTE Energy (DTE) — $2.12 (4.10%)

WisdomTree SmallCap Dividend (DES)

  1. Lexington Corporate Properties Trust (LXP) — $1.50 (7.10%)
  2. Spirit Finance (SFC) — $0.88 (6.10%)
  3. Regal Entertainment (RGC) — $1.20 (5.50%)
  4. Penn Real Estate Invest Trust — N/A
  5. American Financial Realty Trust (AFR) — $0.76 (7.00%)
  6. MCG Capital (MCGC) — $1.76 (10.00%)
  7. Vector group (VGR) — $1.60 (8.70%)
  8. Deluxe (DLX) — $1.00 (2.50%)
  9. National Retail Properties (NNN) — $1.42 (5.90%)
  10. Sunstone Hotel (SHO) — $1.28 (4.40%)

WisdomTree Total Dividend (DTD)

  1. General Electric (GE) — $1.12 (3.00%)
  2. Citigroup (C) — $2.16 (4.00%)
  3. Bank of America (BAC) — $2.24 (4.40%)
  4. AT&T (T) — $1.42 (3.60%)
  5. Exxon Mobil (XOM) — $1.40 (1.70%)
  6. Pfizer (PFE) — $1.16 (4.30%)
  7. Altria Group (MO) — $3.44 (5.00%)
  8. Verizon Communications (MO) — $3.44 (5.00%)
  9. JPMorgan Chase (JPM) — $1.52 (2.90%)
  10. Chevron (CVX) — $2.32 (3.00%)

WisdomTree MidCap Dividend (DON)

  1. American Capital Strategi (ACAS) — $3.56 (7.50%)
  2. Windstream (WIN) — $1.00 (6.60%)
  3. Istar Financial (SFI) — $3.30 (7.00%)
  4. Allied Capital (ALD) — $2.56 (8.60%)
  5. Citizens Comm (CZWI) — $0.20 (2.10%)
  6. Thornburg Mortgage (TMA) — $2.72 (10.00%)
  7. Health Care Property (HCP) — $1.78 (5.20%)
  8. Keyspan (KSE) — $1.90 (4.60%)
  9. New York Community Bancorp (NYB) — $1.00 (5.70%)
  10. Plum Creek Timber (PLC) — $1.68 (4.20%)

SPDR S&P Dividend (SDY)

  1. Consolidated Edison (ED) — $2.32 (4.50%)
  2. Pfizer (PFE) — $1.16 (4.30%)
  3. WGL ldgs (WGL) — $1.37 (4.00%)
  4. Vectren (VVC) — $1.26 (4.40%)
  5. Integrys Energy Group (TGE) — $2.64 (4.40%)
  6. Bank of America (BAC) — $2.24 (4.40%)
  7. Comerica (CMA) — $2.56 (4.10%)
  8. Black Hills (BKH) — $1.36 (3.40%)
  9. Altria Group Inc (MO) — $3.44 (5.00%)
  10. U.S. Bancorp (USB) — $1.60 (4.60%)

Vanguard Dividend Appreciation ETF (VIG)

  1. Chevron (CVX) — $2.32 (3.00%)
  2. ExxonMobil (XOM) — $1.40 (1.70%)
  3. Wal-Mart Stores (WMT) — $0.88 (1.80%)
  4. American International Group (AIG) — $0.66 (1.00%)
  5. General Electric (GE) — $1.12 (3.00%)
  6. Procter & Gamble (PG) — $1.40 (2.30%)
  7. International Business Machines (IBM) — $1.60 (1.60%)
  8. Johnson & Johnson (JNJ) — $1.66 (2.60%)
  9. Coca-Cola (CO) — $1.36 (2.60%)
  10. PepsiCo (PEP) — $1.20 (1.80%)

Vanguard High Dividend Yield Index ETF (VYM)

  1. ExxonMobil (XOM) — $1.40 (1.70%)
  2. General Electric (GE) — $1.12 (3.00%)
  3. Citigroup (C) — $2.16 (4.00%)
  4. AT&T (T) — $1.42 (3.60%)
  5. Bank of America (BAC) — $2.24 (4.40%)
  6. Procter & Gamble (PG) — $1.40 (2.30%)
  7. Altria Group (MO) — $3.44 (5.00%)
  8. Pfizer (PFE) — $1.16 (4.30%)
  9. Johnson & Johnson (JNJ) — $1.66 (2.60%)
  10. JPMorgan Chase (JPM) — $1.52 (2.90%)

What these top 10 holdings tell me is that there are indeed quite some overlaps among funds. For example, Vanguard High Dividend Yield Index ETF (VYM) and PowerShares Dividend Achievers (PFM) have 8 stocks in common in their respective top 10 lists, and they both look like WisdomTree Total Dividend (DTD). However, despite the similarity, VYM holds the edge against PFM in both costs (0.25% vs. 0.67%) and yield (2.90% vs. 1.79%). If you would choose a dividend ETF, then VYM seems to be a better than PFM.

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Now, with the above mentioned dividend-paying stocks, I think I can actually build my own dividend generating portfolios if I choose not to use the existing funds. To do this, I have three options:

  • Use stocks that are mostly used in the dividend-paying ETFs
  • Use stocks that have the highest dividend yield
  • Use stocks that pay the most dividends in dollar amount

And the three lists are:

10 mostly used dividend-paying stocks

  1. Altria Group (MO) — $3.44 (5.00%)
  2. Bank of America (BAC) — $2.24 (4.40%)
  3. Pfizer (PFE) — $1.16 (4.30%)
  4. Verizon Communications (VZ) — $1.62 (4.00%)
  5. Citigroup (C) — $2.16 (4.00%)
  6. AT&T (T) — $1.42 (3.60%)
  7. Chevron (CVX) — $2.32 (3.00%)
  8. General Electric (GE) — $1.12 (3.00%)
  9. JPMorgan Chase (JPM) — $1.52 (2.90%)
  10. Exxon Mobil (XOM) — $1.40 (1.70%)

10 highest yield dividend-paying stocks

  1. MCG Capital (MCGC) — $1.76 (10.00%)
  2. Thornburg Mortgage (TMA) — $2.72 (10.00%)
  3. Vector group (VGR) — $1.60 (8.70%)
  4. Allied Capital (ALD) — $2.56 (8.60%)
  5. American Capital Strategi (ACAS) — $3.56 (7.50%)
  6. Lexington Corporate Properties Trust (LXP) — $1.50 (7.10%)
  7. American Financial Realty Trust (AFR) — $0.76 (7.00%)
  8. Istar Financial (SFI) — $3.30 (7.00%)
  9. Southern Copper (PCU) — $6.00 (7.00%)
  10. Corus Bankshares Inc. — $1.00 (6.10%)

10 highest payout dividend-paying stocks

  1. Southern Copper (PCU) — $6.00 (7.00%)
  2. American Capital Strategi (ACAS) — $3.56 (7.50%)
  3. Altria Group, Inc. (MO) — $3.44 (5.00%)
  4. Istar Financial (SFI) — $3.30 (7.00%)
  5. Thornburg Mortgage (TMA) — $2.72 (10.00%)
  6. Integrys Energy Group (TGE) — $2.64 (4.40%)
  7. Comerica (CMA) — $2.56 (4.10%)
  8. PNC Financial Services Group (PNC) — $2.52 (3.30%)
  9. Embarq (EQ) — $2.50 (3.90%)
  10. Progress Energy (PGN) — $2.44 (4.70%)

I currently have several dividend generators: PEY, PFM, PID, ADVDX, BAC, PG, and PGN (BAC, PG, and PGN are purchases through DRIP programs). I am considering adding MO to my list because after their recent special dividend of $21.91 on April 2, the stock is much more affordable to me. Besides, I am also looking to replace the PowerShares ETFs with Vanguard ETF.

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17 Responses to “Generating Passive Income with Dividend-Paying ETFs and Stocks”

  1. Investing Blog |  May 11, 2007 at 3:45 pm

    Excellent post. I was looking for a few blue chips to further diversify my portfolio.

    10% dividends are outrageous. Take MCGC for example, they would probably benefit more in the long run by reinvesting those earnings. Their revenue is only $40 million a year. I do not how long that 10% dividend will hold up.

  2. zeron |  May 16, 2007 at 3:40 am

    between ETF and stocks, how much percentage( by value) are invested in stocks and ETF? i am new to investing in stocks/funds/etf, should i start with ETF, individual stocks or mutual funds.

    Thanks!

  3. Sun |  May 16, 2007 at 9:58 pm

    I didn’t start investing in ETFs till 2005 (ETF wasn’t popular back then anyway) and was very aggressive. Right now ETFs account less than 30% in my stock+ETF holdings.

    Regarding what to invest, I would say a better choice will be a low cost mutual funds. But it also depends on how you want to invest. If you want to buy a small amount every month so you don’t have to worry about entering the market at wrong time with a big initial investment, then ETF definitely isn’t a good choice because you will have to pay a commission every time you make a purchase (unless you buy it through Zecco which doesn’t charge commissions). Besides, you usually don’t have to pay any extra fees (besides the fund’s ER) if you buy a fund through the fund company. If you just want to make a large one time purchase, then ETF may be better because over the long term, the cost of owning ETF is lower than owning a mutual fund. Investing in individual stocks, in my opinion, is much riskier than investing in funds.

  4. Living Off Dividends |  Jan 30, 2008 at 1:30 pm

    very comprehensive list!

    I’m using Canadian Royalty Trusts for yield. They’re currently under-valued.

  5. Tim |  Jan 29, 2009 at 2:30 pm

    I hate dividends…NOT!

  6. Sun |  Jan 29, 2009 at 4:14 pm

    With many companies, especially the financials which used to pay nice dividends, cutting dividend to close to zero (BAC for example), investors appetite for dividends could be decreasing in the short term. But there are still lots of companies keep increasing dividend payout every year, so I think it’s time to be selective. It’s easier to do with individual stocks.