September hasn't ended yet, and the S&P 500 ( ^GSPC -0.10%) has already delivered an 11.2% total return for the year to date (including dividends) as of this writing. This performance positions the index for a third straight year of above-average returns. Historically, the S&P 500's annualized total returns have hovered between 9% and 10% over the long run.
These robust gains have pushed the S&P 500 to higher valuations, raising the bar for companies to meet elevated expectations. Businesses that maintain strong earnings growth can eventually justify higher valuations, but in times like these, it's crucial to focus on fundamentally sound businesses you truly believe in—rather than those that may falter at the first sign of adversity.
Alternatively, investing in exchange-traded funds (ETFs) can provide access to a wide array of stocks, sometimes numbering in the hundreds or even thousands. Many ETFs also pay dividends based on their underlying holdings, offering an effortless way to generate passive income.
Below, our Fool.com writers explain why the Vanguard Dividend Appreciation ETF ( VIG 0.12%), iShares Core Dividend Growth ETF ( DGRO 0.36%), and Global X S&P 500 Covered Call ETF ( XYLD 0.06%) stand out as top picks—even if the S&P 500 experiences a drop.
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1. A cost-effective ETF for growth-focused investors seeking income
Daniel Foelber (Vanguard Dividend Appreciation ETF): The Vanguard Dividend Appreciation ETF is primarily designed for long-term growth, with passive income as an added benefit. Instead of focusing on high-yield but slow-growing companies, this ETF targets leading growth and value stocks.
The fund’s strategy emphasizes companies that are expected to increase both earnings and dividends over time, rather than those offering high yields today. That’s why over 16% of its assets are invested in top-tier growth names like Microsoft ( MSFT 0.07%), Apple, Broadcom ( AVGO -3.93%), and Oracle, while notable mega-cap companies like Amazon ( AMZN -1.20%) and Tesla are excluded since they do not pay dividends. Similarly, JPMorgan Chase is a major holding, whereas Berkshire Hathaway ( BRK.A 0.42%) ( BRK.B 0.38%) is not included, as Warren Buffett prefers reinvesting profits to generate greater overall returns rather than returning capital through dividends.
Firms that distribute dividends and consistently repurchase shares tend to offer a more balanced approach than businesses like Amazon, which reinvests profits into growth and occasionally dilutes shareholders. Microsoft, for instance, could grow even faster by emulating Amazon’s strategy; instead, it opts to produce strong free cash flow, take measured risks, and reward shareholders by more than offsetting stock-based compensation through buybacks.
Similarly, Broadcom differs from Nvidia in that it has a consistent track record of raising its dividend—15 consecutive years of increases, often in double-digit percentages. As Broadcom rapidly grows its AI-related revenue through demand for custom XPU chips in data centers, it continues to maintain its disciplined approach to dividends rather than overextending on growth bets.
Both Microsoft and Broadcom typically offer lower yields, not due to a lack of dividend growth, but because their share prices have risen faster than their payouts. While many yield-centric ETFs might exclude such companies, the Dividend Appreciation ETF stands out by not penalizing stocks for low yields if their share price performance is strong.
In summary, this ETF is an excellent fit for those who care more about the quality of dividends than the sheer amount. Its expense ratio is just 0.05%, equating to just $5 for every $10,000 invested.
With significant overlap with leading S&P 500 constituents, the ETF's performance will likely mirror the broader market. However, its emphasis on quality makes it a strong candidate for long-term investors, especially during periods of volatility.
2. The iShares Core Dividend Growth ETF: A solid option for boosting passive income
Scott Levine (iShares Core Dividend Growth ETF): If worries about a potential S&P 500 decline are keeping you up at night, you're hardly alone. Many investors are feeling anxious. Although a downturn is never welcome, increasing your passive income through the iShares Core Dividend Growth ETF—which yields 2.1%—can help strengthen your portfolio and give you greater peace of mind.
Holding 397 stocks, this ETF is packed with dividend growers from a diverse range of industries. Financials account for about 20% of the fund, with information technology and healthcare representing 18.6% and 16.9% respectively. The fund’s broad sector exposure helps reduce the impact of a slump in any single industry, making it an appealing choice for risk-averse investors.
The ETF's top holdings feature some of the most prominent names in the market. Broadcom leads as the fund’s largest holding, followed by Apple. Both companies are currently generating substantial free cash flow thanks to their growth in artificial intelligence, giving them plenty of room to boost dividends. The fund also includes long-standing shareholder-friendly companies such as Johnson & Johnson (third-largest holding) and Procter & Gamble (ninth-largest), both of which are classified as Dividend Kings—companies with at least 50 consecutive years of dividend hikes.
With an extremely low 0.08% expense ratio, this ETF provides a cost-efficient way to enhance your passive income with a dependable focus on dividend growth, making it a timely addition to portfolios right now.
3. An ETF with a current distribution yield of 13.5%
Lee Samaha (Global X S&P 500 Covered Call ETF): If market turbulence is a concern and you want to generate regular income, it may be worth exploring ETFs that implement a covered call strategy. These approaches can be difficult for individual investors to replicate but can provide both cash flow and a measure of downside protection when markets are volatile.
The Global X S&P 500 Covered Call ETF operates by owning the S&P 500 index and selling call options on that index. Owning the index gives you equity exposure, while the covered call aspect adds another layer of strategy.
A call option on an index provides its buyer the right—but not the obligation—to purchase the index at a set price (the strike price) within a certain time frame. Investors usually buy calls in anticipation of future price increases, paying a premium for this chance. The call writer (in this case, the ETF) collects the premium and hopes the index doesn't surpass the strike price, which would mean the option is not exercised.
This buy-and-write approach may lag the market during strong rallies (as buyers exercise the calls), but it generally does better in sideways or modestly fluctuating markets, and can also outperform when markets decline for the same reason.
Although the ETF may not deliver positive total returns in a prolonged bear market (since the underlying stocks would fall), it can still generate income in flat or slightly up/down markets. With a trailing 12-month yield of 13.5% paid monthly, it’s a compelling solution for those seeking steady income streams.
