Targeting ASX ETFs with strong dividend yields can be a great way to generate passive income.
While many investors target high dividends through investing in individual stocks, there are several reasons ETFs can be a better choice.
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Why target ASX ETFs for passive income?
Dividend ETFs can provide diversification, regular distributions and a relatively hands-off approach to generating income.
For investors focused on passive income, they can be an attractive alternative to picking individual dividend stocks – particularly when the goal is to build a portfolio designed to produce income over the long term.
An individual company can suddenly cut or suspend its dividend due to falling profits or financial pressures.
Meanwhile, an ETF spreads your investment across multiple dividend-paying companies, reducing the impact of any one company cutting its payout.
Additionally, some income ETFs pay distributions monthly, providing a more consistent payout.
With that in mind, here are three great options to consider.
BetaShares Australian Top 20 Equities Yield Maximiser Complex ETF (ASX: YMAX)
YMAX ETF aims to generate attractive monthly income and reduce the volatility of portfolio returns by implementing an equity income investment strategy over a portfolio of the 20 largest blue-chip shares listed on the ASX.
YMAX does not aim to track an index.
Its 12-month distribution yield currently sits at 7.3%.
This means a $10,000 investment would provide passive income of $730 in annual income, or about $61 per month, assuming the yield remains unchanged.
Vanguard Australian Shares High Yield ETF (ASX: VHY)
VHY ETF offers low-cost exposure to a diversified portfolio of ASX-listed companies with higher expected dividend yields. It aims to provide long-term capital growth alongside income, while limiting concentration risk by capping exposure to individual companies and industries.
The current trailing distribution yield is 3.6%, which means a $10,000 investment would generate approximately $360 per year in passive income.
It is also worth noting this ASX ETF has generated significant capital gains as well.
The fund has climbed 13% in the last 12 months, and risen by an average of 10.5% per annum over 10 years.
It pays distributions quarterly.
Betashares Australian Dividend Harvester Fund (ASX: HVST)
Another great option for income investors is this fund from Betashares.
It aims to provide franked income that exceeds the net income yield of the broad Australian sharemarket on an annual basis, along with exposure to a diversified portfolio of Australian shares.
The fund also offers monthly distributions, creating a more consistent income stream than individual stocks.
It currently offers an annual distribution return of 5.58%, which would mean an annual income of $558 – or $46.5 per month.
