Need reliable investment income? Dividend stocks are your obvious choice. And there are certainly plenty to choose from.
If you're also looking for a simpler option that's just as fruitful as owning a handful of individual dividend payers, however, the obvious choice then becomes an exchange-traded fund, or ETF. And one particular fund fits the bill perfectly if you're looking for a lifetime of passive dividend income.
A well-balanced methodology is still your best bet
The ProShares S&P 500 Dividend Aristocrats® ETF (NOBL 0.65%) is a frequent favorite, and understandably so -- this ETF only holds stocks that have raised their annual dividend payment for at least 25 consecutive years. (The term Dividend Aristocrats® is a registered trademark of Standard & Poor's Financial Services LLC.) At that point, odds are good they'll be able to continue raising their full-year payouts.
This ETF's trailing yield stands right around 2.5%, though, which isn't exactly high. That's the trade-off for well-proven dividend appreciation.
At the other end of the spectrum you'll find something along the lines of the SPDR Portfolio S&P 500 High Dividend ETF (SPYD 0.71%), with a measurably better dividend yield of 4.6%. But this fund is based on the S&P 500 High Dividend Index, which has no inclusion criteria based on dividend history. Rather, the index only consists of a few dozen S&P 500 constituents with the highest forward-looking dividend yields. This would, by default, include stocks with high yields solely stemming from poor performance, which of course could reflect longer-term trouble. It may also include names with little to no dividend growth, meaning the ETF's dividends may struggle to keep up with inflation.
There's a happy-medium prospect to consider. That's the Schwab U.S. Dividend Equity ETF (SCHD 0.16%). It offers an ideal balance of current yield, income growth, and even a bit of capital appreciation.
This ETF is built to mirror the performance of the Dow Jones U.S. Dividend 100 Index. Just as the name suggests, this index prioritizes dividends and dividend yields. It's a bit pickier than the S&P 500 High Dividend Index is, but not quite as picky Dividend Aristocrats® Index. To become a component of the Dow Jones U.S. Dividend 100 Index, a stock must have a track record of at least 10 years of annual dividend growth. But the underlying company must also meet a fairly strict set of fundamental criteria based in measures like free cash flow versus debt and return on equity. Then these tickers are ranked, narrowing them down to just the top 100 prospects. This slight difference in the selection regimen means you're more likely to own a piece of a solid smaller company that's just not on everyone's radar.
NYSEMKT: SCHD
Key Data Points
Better still, unlike too many other indexes and exchange-traded funds these days, the Dow Jones U.S. Dividend 100 Index and this ETF don't allow any single company to make up more than 4% of its portfolio's total value. They also don't allow any single sector to make up more than 25% of the portfolio's value.
In other words, this exchange-traded fund is and remains pretty well diversified. Holders won't have to worry about offsetting any imbalance on their own. Schwab takes care of that for you.
The end result is an ETF with an attractive all-around profile. Its trailing dividend yield is in the ballpark of 3.8%, while the underlying quarterly dividend has nearly tripled over the course of the past decade. Yet -- and here's the fun/interesting part -- the price of the Schwab dividend ETF has grown more than the ProShares dividend ETF's price during this 10-year stretch and has outright trounced the performance of the slightly higher-yielding shares of the SPDR dividend ETF.
Give credit to Dow Jones' (and Schwab's) methodology, most of which combines quality with proven history and balance without excluding a bunch of great dividend stocks you'd likely never find on your own.
The kicker: The fund's annual expense ratio is a mere 0.06%, putting it on par with Vanguard's ultra-low-cost funds.
One is enough
The Schwab U.S. Dividend Equity ETF isn't your only choice, of course. You could even own all three of the aforementioned exchange-traded funds and still not face a pointless degree of overlap.
Yet if your goal is finding a single low-maintenance option capable of producing reliable and growing dividend income -- not to mention producing some capital gains in the meantime -- for decades on end, an instrument based on the Dow Jones U.S. Dividend 100 Index is a solid all-weather choice.
