Building a reliable dividend income stream doesn't require thousands of dollars or complicated stock picking strategies. In fact, $200 is all it takes to scoop up shares of two high-yield dividend ETFs that offer compelling opportunities right now.
The Schwab US Dividend Equity ETF (SCHD -0.67%) and the Vanguard International High Dividend Yield ETF (VYMI -0.21%) give investors significant exposure to many of the best dividend-paying businesses headquartered in the U.S. and abroad. Best of all, with $200 you could buy shares of both and still have enough cash left over for snacks.
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How do these dividend ETFs work?
The Schwab US Dividend Equity ETF and the Vanguard International High Dividend Yield ETF are both passively managed funds that track indexes. The Schwab US Dividend Equity ETF follows the Dow Jones US Dividend 100 Index.
The Schwab US Dividend Equity ETF only considers American companies that have increased their payouts for at least 10 consecutive years, and it excludes real estate investment trusts (REITs). Companies that pass this screen are given a composite score based on debt levels, returns on equity, dividend yield, and five-year dividend growth rates.
The Dow Jones US Dividend Index is limited to 100 companies with the highest composite scores and weighted according to their market cap. The market cap weighting means the largest companies have the greatest impact on performance. On Sept. 2, the two largest holdings were Chevron and ConocoPhillips.
The Vanguard International High Dividend Yield ETF tracks the FTSE All-World ex US High Dividend Yield Index. It's a big index of more than 1,500 stocks, even though it excludes U.S.-headquartered businesses and REITs. The index passively selects for key characteristics that include market cap and dividend yield. At the end of July, Nestlé and Roche were its two largest holdings.
What do these dividend ETFs deliver?
Thanks to a stock split last year, the Schwab US Dividend Equity ETF has been trading for the very accessible price of about $28 per share. If we project its last four dividend payments forward, investors who buy at recent prices will receive a 3.7% yield in the year ahead.
A significantly higher yield in the years ahead seems far more likely than stagnation from the Schwab US Dividend Equity ETF. The quarterly payout that this ETF delivers has grown by 7.6% annually over the past five years.
Shares of the Vanguard International High Dividend Yield ETF are more expensive at a recent price of around $83 per share but they're probably worth it. This ETF's quarterly dividend payout has risen by 13.3% annually over the past five years. Even if future payouts fall in line with last year's, investors who purchase shares at recent prices could receive a 4% yield over the next 12 months.
Both the Schwab US Dividend Equity ETF and the Vanguard International High Dividend Yield ETF are passively managed. Without any active money managers to pay, they boast low expense ratios. This means nearly all the gains their underlying indexes make reach your brokerage account.
The Vanguard International High Dividend Yield ETF sports an expense ratio of 0.17%. It's a little high because it tracks international stocks. The Schwab US Dividend Equity ETF comes with a much lower 0.06% expense ratio.
Why pick favorites?
The Schwab US Dividend Equity ETF has underperformed the Vanguard International High Dividend Yield ETF over the past five years, but this might not be the case in the years ahead. Instead of putting all your eggs in one basket, splitting your investment between the two is an excellent way to keep a geographically diverse portfolio.
