There is no single way to invest for income, and as such, there is no single exchange-traded fund (ETF) for income investors to buy. If you are trying to build a diverse income stream, in fact, you'll probably want to buy several ETFs.
Here are three that work particularly well together, providing a combination of high yields and different investment styles that will cover most of what a dividend investor wants.
1. The Schwab U.S. Dividend Equity ETF is a core holding
The Schwab U.S. Dividend Equity ETF (SCHD 0.07%) is best viewed as a foundational investment, particularly with the trio of ETFs under consideration here. You may want to allocate 50% or more of your portfolio to this ETF. That's because it basically does what most dividend investors would do if they bought individual stocks.
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The starting point is to eliminate real estate investment trusts (REITs) and any stocks that have fewer than 10 consecutive annual dividend increases behind them. After that culling, a score is created that combines cash flow to total return, return on equity, dividend yield, and a five-year dividend growth rate into a single metric. The 100 stocks with the highest composite score get into the portfolio and are market-cap weighted.
Essentially, the Schwab U.S. Dividend Equity ETF buys high-quality dividend growth stocks, with a bias toward higher-yielding stocks. The expense ratio is a modest 0.06%, and the dividend yield is currently around 3.7%, which is well above twice the level of the S&P 500.
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2. The SPDR Portfolio S&P 500 High Dividend ETF covers areas you've missed
The SPDR Portfolio S&P 500 High Dividend ETF (SPYD 0.09%) pairs up nicely with the Schwab U.S. Dividend Equity ETF because they take vastly different approaches, which leads to vastly different portfolios. The SPDR Portfolio S&P 500 High Dividend ETF is super simple. It just buys the 80 highest-yielding stocks in the S&P 500 index. The expense ratio is a reasonable 0.07%, and the current yield is around 4.3%.
What's interesting is that this ETF tends to have heavy weightings in utility stocks and real estate investment trusts (REITs), two areas that are usually lacking in the Schwab ETF. Unlike the Schwab ETF, the SPDR Portfolio S&P 500 High Dividend ETF will often pick up out-of-favor stocks. In other words, the two ETFs aren't overlapping investments. They both add value in their own way. The SPDR Portfolio S&P 500 High Dividend ETF is probably appropriate for somewhere around 30% of your portfolio.
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3. The Amplify CWP Enhanced Dividend Income ETF gets complicated
The Amplify CWP Enhanced Dividend Income ETF (DIVO 0.46%) is an options income ETF. It is actively managed, so there's no specific investment screen to describe. However, management has a penchant for high-quality dividend growth stocks. But those stocks -- usually only around 30 companies or so -- often have very modest yields. To compensate for this, the team strategically sells covered calls on a portion of the portfolio to generate income.
This is a far more complex approach, as there is always something going on with the options side of the portfolio. Thus, the expense ratio is a bit high at 0.56%. And while the yield is listed as 4.7%, the actual payment fluctuates each month based on the success of the options strategy. This is more of an icing-on-the-cake type investment than a core income holding, and it should probably make up only 20% or less of your portfolio.
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That said, the Amplify CWP Enhanced Dividend Income ETF lets you buy stocks that would likely never be in your portfolio because they have lower yields. So, this ETF actually helps to add some growth to the mix, along with the income it generates. And it most certainly doesn't overlap with either of the two ETFs on the strategy front.
Complimentary ETF selections
The Schwab U.S. Dividend Equity ETF, the SPDR Portfolio S&P 500 High Dividend ETF, and the Amplify CWP Enhanced Dividend Income ETF work together to create a fairly well-balanced dividend stock portfolio. Although you should probably overweight the Schwab ETF relative to the other two ETFs, you can increase the income you generate by shifting the weightings around.
Covering dividend growth, high-yield, and options income strategies, this trio provides an attractive overall income stream that should be resilient to the market's ups and downs over the long term, if history is any guide. The best part is that you'll have to do very little to maintain your portfolio because the ETFs are doing most of the hard work for you.
