In today’s relatively high-interest rate environment, it isn’t too much of a challenge to get yields of 3%, 4%, or even more on your money. In fact, as of this writing, you can find 4% yields from high-yield savings accounts, CDs, and Treasury securities.
However, if you want a combination of a high yield and long-term growth potential, it’s not quite so easy. Dividend-paying stocks are the best way to achieve a combination of growth and income, but investing in individual stocks isn’t the best way to go for everyone. With that in mind, here are two excellent ETFs you can buy right now that have excellent dividend yields with great total return potential.
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The Vanguard High Dividend Yield ETF (NYSEMKT: VYM) could be an excellent choice for investors who want passive dividend income, but also don’t want to worry about their long-term total return potential.
The short description of this ETF is that it owns a portfolio of stocks that pay above-average dividend yields, with greater weightings going toward the largest positions. Top holdings of the ETF, just to name a few, are Broadcom, JPMorgan Chase, ExxonMobil, and Home Depot. In a nutshell, the fund’s portfolio is primarily composed of large-cap, rock-solid companies with steady cash flows and long histories of producing strong returns.
Over the past decade, the Vanguard High Dividend Yield ETF has produced an annualized total return of about 10.2%, and it has a minuscule 0.06% expense ratio, so your investment fees are kept to a minimum. As of this writing, the ETF has an annualized dividend yield of about 2.7%.
The real estate sector was one of the market’s worst performers in 2022 and 2023, and the main reason is its sensitivity to interest rates. Without turning this into an economics lesson, income-based investment yields tend to increase as risk-free interest rates do. Since price and yield have an inverse relationship, this leads to pressure on real estate investment trust (REIT) prices.
Conversely, REITs could get a positive tailwind as rates fall. The Federal Reserve has already lowered benchmark interest rates and is widely expected to continue doing so for at least the next couple of years.
Regardless of the trajectory of interest rates, the Vanguard Real Estate ETF (NYSEMKT: VNQ) could be a great addition to your portfolio. This ETF, which has a 3.7% dividend yield, invests in a weighted index of REITs. Not only have real estate investment trusts historically produced total returns that are similar to (or slightly greater than) the S&P 500 (SNPINDEX: ^GSPC), but they have done so with less volatility over time.
