Build Dividend Income at Low Cost With These ETFs

Creating reliable passive income through exchange-traded fund (ETF) investments doesn't necessarily mean one has to seek out only ultra-high dividend yields, which often come with similarly significant management fees. It's possible to find attractive income funds that combine strong yields, broad diversification, and minimal costs. ETFs with expense ratios measured in just a few basis points can help to generate income from distributions while also providing the risk mitigation that comes with a broad basket of positions as opposed to individual securities.

The dividend ETF space is huge and only growing bigger, but three standout choices include the Vanguard High Dividend Yield ETF (NYSEARCA: VYM), the Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ: VCIT), and the iShares Core U.S. Aggregate Bond ETF (NYSEARCA: AGG). Typically, bond funds are synonymous with dividend payments, and the latter two of these funds do indeed hold baskets of bonds, although with entirely different focuses. The first, however, is a stock ETF, providing diversification options across asset classes.

A Triple-Threat Large-Cap Stock Fund With Low Costs, Big Dividends, and Market-Beating Returns

At an annual fee of just 0.04%, VYM is not only one of the cheapest dividend funds available, but it's also among the lowest-cost ETFs, period. With 20 years of trading history and $83 billion in managed assets, VYM is a stalwart of the ETF space, providing investors with access to large-cap companies trading in the United States and categorized as value stocks.

Investors look to VYM for a collection of more than 600 of the most stable, successful businesses in the world, including popular dividend payers like Johnson & Johnson (NYSE: JNJ) and Procter & Gamble (NYSE: PG), among many others. With such a large portfolio, many stocks have quite small allocations, although a small handful represent between roughly 2% and 7% of the portfolio each. Sector diversification helps to ensure that investors are not overly exposed to certain segments of the market.

Though most of the firms in VYM's portfolio have already seen their biggest growth days, the fund has nonetheless achieved year-to-date (YTD) returns of 14%, beating the broader market. The bigger story, however, may be its dividend yield of 2.20%.

Moderate Credit and Interest-Rate Risk in the Corporate Bond Space

VCIT is an option for investors looking to bulk up bond exposure while also looking outside of Treasuries. This fund holds a portfolio of mostly investment-grade corporate bonds that are linked to companies with strong financial health. Issuers are located across multiple sectors and industries for diversification. With the typically higher yields that these bonds provide relative to U.S. Treasuries, VCIT holders receive the potential for additional income in exchange for some moderate credit risk.

Specifically, VCIT looks to intermediate-maturity bonds, which gives the fund a nice balance between yield and interest-rate sensitivity. The result is a fund with a solid dividend yield of 4.86%, all for a seriously low expense ratio of just 0.03%. Like many other low-cost Vanguard funds, VCIT benefits from being part of this massive fund issuer's line-up of products, and investors have flocked to the fund for its stability and cost: it has more than $67 billion in managed assets and robust trading volume.

The Core Bond Fund of Choice for Many

Sometimes investors are seeking bond exposure without the specialization of VCIT or a similar offering, and in this case, AGG is a compelling choice. This fund tracks an aggregate bond index with exposure to thousands of U.S. bonds ranging from Treasuries to mortgage-backed securities, investment-grade corporates, and much more.

With such breadth in the portfolio, it's no surprise that AGG is one of the most popular bond funds on the market. The fund has $137 billion in assets and trading volume even more impressive than VCIT, all for the same expense ratio of 0.03%. These figures signal just how many investors see AGG as a core portfolio holding for fixed-income exposure thanks to its steady income, capacity to reduce overall portfolio volatility, and defensive position in the face of equity market declines.

The fund's dividend yield of 4.03% is solid, although not the highest yield that investors can find in the bond ETF space. In exchange, though, investors receive some of the most impressive diversification—including a high allotment of stable government-backed securities—of any bond fund available.

Across these three funds, investors can build investment income for low costs and from a variety of different sources. They are distinct enough to be mixed and matched within a single portfolio, but each can also individually help to pursue dividend income and portfolio stability.

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