Investing in dividend stocks is a great way to generate a steady stream of recurring income for your portfolio. But ideally, you don't invest in just one or two dividend stocks, because then you run the risk of a dividend cut or suspension suddenly affecting the income that you've been relying on. To diversify and to minimize your overall risk, it's better to invest in an exchange-traded fund (ETF) that pays dividends.
With an ETF that invests in dozens of dividend stocks, you get some valuable diversification, and that can help ensure that you're able to collect a consistent payout for years. The Schwab U.S. Dividend Equity ETF (SCHD +1.97%) and the SPDR Portfolio S&P 500 High Dividend ETF (SPYD +1.64%) are excellent ETFs that yield 4% and can set you up to earn dividends for not just years, but decades. Here's a look at why these can be ideal buy-and-hold investments to build your portfolio around.
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Schwab U.S. Dividend Equity ETF
The Schwab U.S. Dividend Equity ETF is a low-cost fund that offers high dividend payments to investors. The fund's expense ratio of 0.06% is minimal and very competitive compared with other ETFs. With around 100 holdings, it is also more focused. Many ETFs with low fees simply invest in hundreds or even thousands of stocks. When it comes to dividend stocks, it's important to have a bit more concentration to ensure you're getting exposure to quality investments, not just any stock that pays a dividend.
One of the fund's aims is to focus on quality and sustainability of dividends, and choosing stocks with strong fundamentals. Some of the dividend stocks that are among its top 10 holdings are Coca-Cola, Home Depot, and Verizon Communications. These are all stocks that would be good dividend investments on their own. Within this ETF, you have decent exposure to them plus many other income-generating stocks.
By holding these and other solid dividend stocks, this ETF can put you in a strong position to ensure you're generating consistent income for the long haul. They are all established businesses, with 62% of the fund's holdings being stocks with market caps of more than $70 billion. Another 29% have valuations between $15 billion and $70 billion.
As of entering trading on Tuesday, this Schwab ETF has declined slightly by 2% since the start of the year, which isn't bad given how volatile the markets have been thus far. With a beta of less than 0.8, this has generally made for a good, stable investment to hang on to over the years. That's another important feature for investors who just want a dividend and to not worry about wild swings in value.
SPDR Portfolio S&P 500 High Dividend ETF
Another fund that gives you exposure to top S&P 500 dividend stocks is the SPDR Portfolio S&P 500 High Dividend ETF, where you can earn even more dividend income with its 4.5% yield. With an expense ratio of 0.07%, it's another low-cost option for long-term investors to consider, as the fees from this investment won't be significant.
The fund tracks the S&P 500 High Dividend Index, which gives investors exposure to 80 of the highest-yielding stocks within the S&P 500. As of June 9, the actual number of holdings in the fund was slightly less than that at 77. A big benefit of this ETF is that since it's already focusing on stocks within the S&P 500, which is a highly vetted index, you know that these are fairly safe investments to be holding on to.
Among the top holdings in this ETF are big names such as AbbVie, CVS Health, and AT&T. But no stock within this fund accounts for over 2% of the ETF's overall weight, which can be valuable to risk-averse investors who don't want significant exposure to any one single stock. Another attractive feature of the fund is that it focuses on fairly stable sectors such as real estate and utilities -- together, they account for around 42% of the ETF's total holdings.
The downside is that by being a bit more conservative, the ETF's long-run returns have lagged behind those of the Schwab U.S. Dividend Equity fund and the S&P 500 index. But this year, it's only down around 1%. For long-term investors, having a position in the S&P 500 is a great way to grow wealth, and with this fund, you'll be in an excellent position to generate a ton of dividend income for decades.
