There are many ways to generate passive income. One of the easiest is to invest in an exchange-traded fund (ETF) focused on income-producing investments. These professionally managed funds come with built-in diversification, making them ideal investments to buy and hold for passive income.
The Global X SuperDividend ETF (SDIV 0.33%) enables investors to maximize their passive income production. The fund invests in 100 of the highest dividend-paying stocks around the world. Over the past 12 months, the dividend ETF‘s yield is over 10%. At that rate, a $10,000 investment in the ETF would produce over $1,000 of dividend income each year.
The caveat is that with that higher yield comes a higher risk profile.
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A supercharged dividend fund
The Global X SuperDividend ETF tracks the Solactive Global SuperDividend Index. That index follows 100 of the highest-yielding dividend stocks in the world. It subjects them to several qualitative checks to determine dividend stability and will remove companies that no longer pass its screening.
The index weights companies equally. That reduces the risk that one company will have an outsized impact on performance. Meanwhile, its broad geographic diversity helps lower interest rate risk, which can have a meaningful impact on the values of higher-yielding dividend-paying stocks.
The ETF collects dividend income from its 100 holdings and distributes that cash to investors each month. Over the past year, the fund has made distributions equating to a 10.8% yield.
Higher yields, higher risk profiles
The Global X SuperDividend ETF has made monthly income payments to investors for 13 years. However, those payments have fluctuated considerably:
SDIV Dividend data by YCharts
That’s because, despite the index’s qualitative checks on dividend sustainability, higher-yielding dividend stocks tend to have higher risk profiles. These companies often have more volatile earnings, weaker financial profiles, and high dividend payout ratios. As a result, many of the higher-yielding dividend stocks it holds have had to cut their payments more than once.
For example, one of the Global X SuperDividend ETF’s 100 holdings is AGNC Investment (AGNC 0.45%). The mortgage REIT currently has a whopping 16% dividend yield. The company makes money by investing in mortgage-backed securities (pools of residential mortgages) using leverage.
That strategy can enable AGNC to earn high returns. However, if market conditions deteriorate, the REIT’s earnings fall. As a result, it has had to reduce its dividend payment several times over the years.
Other holdings pay variable dividends. For example, oil tanker company Frontline‘s (FRO 6.81%) earnings tend to be very volatile, ebbing and flowing with global tanker rates, which can move sharply based on demand and the availability of oil tankers. Because of that, Frontline aims to align its dividend with its earnings by adjusting it each quarter based on its profitability in the period.
The company has paid an average quarterly dividend of $0.45 per share over the past year, giving it a 10% yield on its share price. However, its payout has been as high as $0.62 per share and as low as $0.20 per share.
A higher-risk, higher-reward dividend ETF
The Global X SuperDividend ETF enables investors to hold 100 of the highest-yielding dividend stocks in the world through a single fund. That allows them to generate a lot of passive income. However, the fund has a higher risk profile, which means it’s not the best option for those seeking a bankable income stream. It’s better for those willing to take on more risk to maximize their passive income production.
Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.