When I started investing, my investment choices were pretty limited. Today, with the advent of exchange-traded funds (ETFs), there is more that investors can do, and the costs are attractively cheap. If I were a new dividend investor today, I probably wouldn't buy individual stocks. Instead, I would buy Schwab US Dividend Equity ETF (SCHD 0.42%), S&P Portfolio S&P 500 High Dividend ETF (SPYD 0.49%), and Amplify CWP Enhanced Dividend Income ETF (DIVO 0.39%). Here's why.
I'm emotionally locked in, but you don't have to be
When I was in my teens, my father introduced me to investing. It created a lifelong passion and has allowed me to build a sizable nest egg for my family. (Thanks, Dad!) I really enjoy doing the legwork that's involved in researching stocks, keeping up to date on them, and, mostly, seeing the stock dividends hit my account every month. My enjoyment of the investing process is an important fact here because, back when I was in high school, the choices for dividend investors were, to revert back to my youth, "lame."
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That's not the case today, and a lot of it has to do with the growth of index investing and the creation of exchange-traded funds. If I were to start investing today, the enhanced landscape of opportunities would likely lead me to ETFs and a heavier focus on saving money (which is where most investors can do the most good for their long-term financial success). However, what dividend ETFs would I buy? I believe Schwab US Dividend Equity ETF, S&P Portfolio S&P 500 High Dividend ETF, and Amplify CWP Enhanced Dividend Income ETF work together to cover a huge amount of dividend investing ground.
What does Schwab US Dividend Equity ETF do?
Schwab US Dividend Equity ETF only looks at companies that have increased their dividends annually for at least a decade, and it excludes real estate investment trusts (REITs). That's a sweet spot for me, as it highlights companies that have a commitment to returning value to shareholders via dividends and requires a company to be generally well-run. However, the ETF doesn't stop there.
Once it has that pool of candidates, Schwab US Dividend Equity ETF creates a composite score looking at cash flow to total debt, return on equity, dividend yield, and the five-year dividend growth rate. The 100 stocks with the highest composite scores get into the ETF and are weighted by market cap, so the largest companies have the biggest impact on performance. Without getting into the details, this approach basically creates a portfolio of high-quality, high-yield dividend growth stocks. The cost? A tiny 0.06%.
The ETF's dividend yield is roughly 3.5%, which isn't massive, per se, but is much higher than the 1.2% available from the S&P 500 index (^GSPC 1.33%). More importantly, Schwab US Dividend Equity ETF is doing exactly what most dividend investors are trying to do: buy good dividend stocks.
What does S&P Portfolio S&P 500 High Dividend ETF do?
With good dividend stocks covered, there are a few caveats to consider. Schwab US Dividend Equity ETF has no exposure to REITs and has limited exposure to utilities (largely because of the screening methodology). It also won't likely own a lot of companies that are turnaround stories. All of these exclusions have value in the dividend investing world. S&P Portfolio S&P 500 High Dividend ETF helps to fill in those gaps.
While Schwab US Dividend Equity ETF uses a complex approach, S&P Portfolio S&P 500 High Dividend ETF's methodology is shockingly simple. It selects from the S&P 500 index, which ensures that the companies it is looking at are large and economically important. Then, it just picks the 80 with the highest yield. That tends to result in a heavy concentration in REITs and utilities. It will include high-yield stocks that would fall into the turnaround camp.
The expense ratio is a reasonable 0.07%, and the yield is 4.2%. There's one more notable fact: The stocks in the ETF are equally weighted, so each investment has the same opportunity to impact performance. This helps to limit risk since no investment is disproportionately large.
What does Amplify CWP Enhanced Dividend Income ETF do?
With just two ETFs, investors can cover a huge amount of dividend ground. But there's one more little income tactic that I would want to include, and that's selling covered calls. This can be a complicated tactic, so I don't do it myself. I "hired" Amplify CWP Enhanced Dividend Income ETF to do it for me. If I were starting over, I'd "hire" this ETF again, even though the 0.56% expense ratio is a bit high. (It is a specialized type of investing, so it probably deserves a premium price tag.)
Amplify CWP Enhanced Dividend Income ETF is actively managed, so there's no detailed methodology to explain. Quite simply, the managers buy 30 or so dividend stocks that they believe are high-quality. Then, they opportunistically write covered calls on the portfolio. This is what I would be doing, too, if I wanted to create a covered call portfolio. The big benefit is that covered calls can help generate extra income for investors. The dividend will vary over time because of the nature of the covered call approach, but the yield is currently 4.5% or so.
Lean toward quality if you use these three ETFs
If I were to put this portfolio together, I would probably put 50% to 60% of it in Schwab US Dividend Equity ETF despite its lower yield. The focus on quality stocks is worth it. Then, I would split the rest of the portfolio equally between S&P Portfolio S&P 500 High Dividend ETF and Amplify CWP Enhanced Dividend Income ETF. That would help increase my yield, keep my risk minimized, and create a fairly well-diversified portfolio. The only thing I might add would be a broad-based bond ETF, and I'd be done, spending my time enjoying life and, of course, squirreling as much cash away as I could manage.
