There's no one right approach to investing that everyone should follow. That's true even when you home in on a specific style, like dividend investing. That's why some investors will like the SPDR Portfolio S&P 500 High Dividend ETF (SPYD -0.57%), and others will appreciate the Schwab US Dividend Equity ETF (SCHD -0.65%). Most investors, however, should probably consider buying both, which you can easily do with as little as $100.
What do these dividend ETFs do?
From a big-picture perspective, the SPDR Portfolio S&P 500 High Dividend ETF and Schwab US Dividend Equity ETF just track indexes. For the SPDR Portfolio S&P 500 High Dividend ETF, the index is the S&P 500 High Dividend Index. The Schwab US Dividend Equity ETF tracks the Dow Jones U.S. Dividend 100 Index. From an investment perspective, the index is interchangeable with the exchange-traded fund (ETF) in both of these situations. That said, both of these ETFs have very different goals.
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The SPDR Portfolio S&P 500 High Dividend ETF essentially takes all the stocks in the S&P 500 index (^GSPC -0.33%) and lines them up by dividend yield. The 80 stocks with the highest yields are put into the index and the ETF using an equal weighting methodology. Equal weighting allows each stock to have the same effect on performance as every other. The clear goal here is to generate as high a yield as possible, while sticking with the large and economically important companies included in the S&P 500 index. It trades for a little under $50 a share.
The Schwab US Dividend Equity ETF is far more complex. It only considers companies that have increased their dividends for 10 consecutive years or longer, excluding real estate investment trusts. For each company that passes that screen, a composite score is created.
The composite score looks at cash flow to total debt, return on equity, dividend yield, and a company's five-year dividend growth rate. The 100 companies with the highest scores make it into the index and ETF. A market cap weighting approach is used, which means that the largest companies will have the biggest effect on performance. The overarching goal is to find financially strong dividend growers with attractive yields. It trades for a little over $25 per share.
These high-yield ETFs have complementary approaches
The SPDR Portfolio S&P 500 High Dividend ETF has a roughly 4.5% yield. The Schwab US Dividend Equity ETF's yield is around 4%. Both are fairly attractive yields, given that the S&P 500 index is only yielding around 1.3% today.
So either one of these high-yield ETFs could be a good fit for your income portfolio. However, there's an important nuance that suggests that buying both may be the better choice.
The SPDR Portfolio S&P 500 High Dividend ETF is selecting just from the S&P 500 index, which severely limits its investing universe. Since certain sectors tend to be more focused on dividends than others, like real estate, utilities, and finance, the ETF will generally have a heavy weighting in those sectors. It will also tend to pick up out-of-favor companies that are in a turnaround situation.
The Schwab US Dividend Equity ETF's approach allows it to pick from a broader universe, and it is clearly focused on company quality and business growth in addition to dividends and yield. It will generally be buying companies outside of the groups in which the SPDR Portfolio S&P 500 High Dividend ETF is focused.
While both investment approaches have merit on their own, putting them together in one portfolio will allow you to have exposure to a broader range of dividend stocks. That increased diversification will likely be a net benefit to your income portfolio. Indeed, every investment approach eventually goes in and out of favor over time, so having exposure to two dividend tactics should help to even your overall performance out over time.
Don't limit yourself -- consider buying both high-yield ETFs
If you're only looking to buy one dividend ETF, the Schwab US Dividend Equity ETF is probably the best option. After all, it is looking at the types of things that a dividend investor would likely be considering, too. However, pairing it with the SPDR Portfolio S&P 500 High Dividend ETF's higher-yielding and higher-risk approach may be a better solution for those who are willing to take on a little more risk. The best part is that you can buy a share of each with $100 and still have some cash left over!
