There is no one "right" way to invest. You need to find a path that makes sense to you so you can stick to it through the inherent ups and downs of the stock market. For example, there are many different ways to approach dividend investing. Which is why dividend-focused retirees will want to look at the SPDR Portfolio S&P 500 High Dividend ETF (SPYD 0.77%), the Vanguard Dividend Appreciation ETF (VIG 0.23%), and the Schwab U.S. Dividend Equity ETF (SCHD 0.55%) before picking a final option. Here's how these dividend exchange-traded funds (ETFs) differ and what that means for you.
1. SPDR Portfolio S&P 500 High Dividend ETF
The S&P 500 High Dividend ETF has an expense ratio of 0.07%. That's extremely low, but not the lowest on this list. The dividend yield is a fairly generous 4.4%, which is the highest on this list. That, however, makes complete sense given the index the ETF follows, S&P 500 High Dividend Index.
The S&P 500 High Dividend ETF owns the 80 highest yielding stocks in the S&P 500 index. That said, unlike the S&P 500, the S&P 500 High Dividend ETF is equally weighted, meaning that every stock gets allotted the same amount of capital. In function this means that the smallest company can have the same impact as the largest on overall performance.
After the high yield, the biggest draw for this exchange-traded fund is the fact that the holdings are drawn from the S&P 500. The S&P 500 is a curated index, with the included stocks selected to be representative of the broader economy. Pulling the highest-yielding stocks out will tend to bias S&P 500 High Dividend ETF toward certain sectors, like real estate, utilities, and financials, but the investments in those sectors will be in companies that are generally large and well known.
2. Vanguard Dividend Appreciation ETF
The Vanguard Dividend Appreciation ETF has a completely different focus, which is highlighted by the slim 1.7% yield. As the name implies, dividend growth is more important than yield. This ETF is tied for the lowest expense ratio on the list at 0.06%.
Vanguard Dividend Appreciation tracks the S&P U.S. Dividend Growers Index. This index is made up of the stocks of companies that have increased their dividends for at least 10 consecutive years. Then the highest-yielding 25% of the list are eliminated from consideration. Also real estate investment trusts (REITs) are culled out of the list and deemed ineligible.
What's left is the list of eligible companies, which are market cap weighted. In this way, the largest companies will have the largest impact on the ETF's performance. The key focus here is clearly dividend growth, which will make this a good fit if that's the type of investment approach that makes the most sense to you. Currently the largest sector weightings are in technology, financials, and healthcare.
3. Schwab U.S. Dividend Equity ETF
The Schwab U.S. Dividend Equity ETF is something of a middle ground between the two other dividend ETFs on this list. The yield, for example, is 3.3% and the expense ratio is 0.06%. The Schwab U.S. Dividend Equity ETF tracks the Dow Jones U.S. Dividend 100 Index.
First, the Schwab U.S. Dividend Equity ETF excludes REITs and small companies. It then requires that all companies have at least 10 years of annual dividend increases behind them. Then it screens for company quality, examining things like leverage, return on equity, and dividend growth rate. It creates a composite score for each company and the 100 top ranked stocks make it into the index. The index is market cap weighted. While still a mechanically created index, the list here is more curated than the above ETFs, as it attempts to find a mix of yield, dividend growth, and company quality. The largest sectors today are industrials, financials, and healthcare.
Pick the one that speaks to you
As you look at this trio of dividend-focused ETFs, you'll probably find one that sounds more appealing. That's exactly the point, since they each go about dividend investing in a slightly different manner. Your goal is to find the dividend approach that you will feel most comfortable sticking with even when the market has fallen into bear territory. But, to sum it up, dividend growth investors will probably prefer Vanguard Dividend Appreciation, growth and income investors will likely find Schwab U.S. Dividend Equity ETF most appealing, and those focused on high yield will want to dig into S&P 500 High Dividend ETF.
