Many exchange-traded funds (ETFs) focus on holding dividend-paying stocks. While that gives income-seeking investors lots of options, it can make it difficult to know which is the best one to buy.
The Schwab U.S. Dividend Equity ETF (SCHD 0.07%) and Pacer Global Cash Cows Dividend ETF (GCOW -0.43%) are two notable dividend ETFs. Here's a look at which is the better one to buy for those seeking to generate passive income.
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Different strategies for selecting high-yielding dividend stocks
The Schwab U.S. Dividend Equity ETF and the Pacer Global Cash Cows Dividend ETF aim to provide their investors with above-average dividend income by holding higher-yielding dividend stocks. The ETFs each hold roughly 100 dividend stocks. However, they use different strategies to select their holdings.
The Schwab U.S. Dividend Equity ETF aims to track the returns of the Dow Jones U.S. Dividend 100 Index. That index screens U.S. dividend stocks based on four quality characteristics:
- Cash flow to debt.
- Return on equity (ROE).
- Indicated dividend yield.
- Five-year dividend growth rate.
The index selects companies that have stronger financial profiles than their peers. That should enable them to deliver sustainable and growing dividends, and the Schwab U.S. Dividend ETF accordingly provides investors with a higher-yielding current dividend that should grow at an above-average rate. At its annual reconstitution, its 100 holdings had an average dividend yield of 3.8% and a five-year dividend growth rate of 8.4%.
The Pacer Global Cash Cows Dividend ETF uses a different strategy for selecting its 100 high-yielding dividend stocks. It starts by screening the 1,000 stocks in the FTSE Developed Large-Cap Index for the 300 companies with the highest free cash flow yield over the past 12 months. It screens those stocks for the 100 highest dividend yields. It then weights those 100 companies in the fund from highest yield to lowest, capping its top holding at 2%. At its last rebalance, which it does twice a year, its 100 holdings had an average free cash flow yield of 6.3% and a dividend yield of 5%.
Here's a look at how the top holdings of these ETFs currently compare:
|
SCHD |
GCOW |
|---|---|
|
ConocoPhillips, 4.4% |
Phillip Morris, 2.6% |
|
Cisco Systems, 4.3% |
Engie, 2.6% |
|
Texas Instruments, 4.2% |
British American Tobacco, 2.4% |
|
Altria Group, 4.2% |
Equinor, 2.2% |
|
Coca-Cola, 4.1% |
Gilead Sciences, 2.2% |
|
Chevron, 4.1% |
Nestle, 2.2% |
|
Lockheed Martin, 4.1% |
AT&T, 2.2% |
|
Verizon, 4.1% |
Novartis, 2.1% |
|
Amgen, 3.8% |
Shell, 2.1% |
|
Home Depot, 3.8% |
BP, 2% |
Data sources: Schwab and Pacer.
Given their different strategies for selecting dividend stocks, the funds have very different holdings. SCHD holds only companies with headquarters in the U.S., while GCOW takes a global approach. U.S. stocks make up less than 25% of its holdings. Meanwhile, SCHD weights its holdings based on their dividend quality, while GCOW weights them based on dividend yield. Given its focus on yield, GCOW offers investors a higher current income yield at 4.2%, compared with 3.9% for SCHD.
Costs and returns
While SCHD and GCOW focus on higher-yielding dividend stocks, their strategies in selecting holdings have a major impact beyond the current dividend income. Because SCHD is a passively managed ETF while GCOW is an actively managed fund, SCHD has a much lower ETF expense ratio than GCOW. SCHD's is just 0.06%, compared with GCOW's 0.6%. Put another way, every $10,000 invested would incur $60 in management fees each year if invested in GCOW, compared with only $6 in SCHD.
GCOW's higher fee really eats into the income the fund generates, which affects its returns over the long term. The fund's current holdings actually have a 4.7% dividend yield, whereas the fund's latest payout had only a 4.2% implied yield.
|
ETF |
1-Year |
3-Year |
5-Year |
10-Year |
Since Inception |
|---|---|---|---|---|---|
|
GCOW |
11.2% |
8.4% |
15.5% |
N/A |
8.8% |
|
SCHD |
3.8% |
3.7% |
12.2% |
10.6% |
12.2% |
Data sources: Pacer and Schwab. Note: GCOW's inception date is 2/22/16, while SCHD's is 10/20/11.
GCOW has outperformed SCHD over the past five years. However, SCHD has delivered better performance over the longer term. That's due to its lower costs and focus on companies that grow their dividends, which tend to produce the highest total returns over the long term.
SCHD is a better ETF for passive income
SCHD and GCOW hold higher-yielding dividend stocks, making either ETF ideal for those seeking passive income. However, SCHD stands out as the better one to buy because of its focus on dividend sustainability and growth. It also has a much lower ETF expense ratio. So it should provide investors with an attractive and growing stream of passive dividend income.
