You'll have plenty of options to consider if you have $500 to put to work and you want to buy a high-yield exchange-traded fund (ETF). But three stand out from the pack as buy-and-hold opportunities.
Vanguard High Dividend Yield ETF (VYM 0.41%), Invesco High Yield Equity Dividend Achievers ETF (PEY 0.44%), and Schwab US Dividend Equity ETF (SCHD 0.11%) all take different approaches and will likely appeal to different investors. Here's how to pick the one that's best for you.
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1. Vanguard High Dividend Yield ETF: Diversification is the key
The big story with Vanguard High Dividend Yield ETF is diversification, noting that the exchange-traded fund owns over 566 dividend-paying stocks. That's right up there with the S&P 500 index (^GSPC 1.17%) when it comes to the number of holdings. Simply put, if you want to have the widest possible exposure to high-yield dividend stocks, this exchange-traded fund is likely the best choice for you.
NYSEMKT: VYM
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The way the Vanguard High Dividend Yield ETF is created is fairly simple. All of the U.S. dividend-paying stocks are lined up in a row from highest yield to lowest yield. And basically, the top half of the list is included in the ETF. There are limitations to this approach, since it will guarantee that you own some troubled businesses, but that risk should be offset by the diversification, plus the 0.06% expense ratio is fairly low.
A $500 investment will let you buy around three shares of the Vanguard High Dividend Yield ETF. The dividend yield, meanwhile, is 2.5%, more than twice the yield of the S&P 500 index today.
2. Invesco High Yield Equity Dividend Achievers ETF: Dividend streaks matter
Invesco High Yield Equity Dividend Achievers ETF uses a more focused approach. It starts by looking only at stocks that have increased their dividends for at least a decade. It then picks the 50 stocks with the highest yields from that list, weighting them by dividend yield. The other two ETFs here use market cap weighting, which means that the largest companies have the biggest impact on performance. Weighting by yield means the highest-yield stocks have the greatest impact on performance.
The ETF's approach clearly leads to a more focused portfolio but it also results in a much higher dividend yield of 4.6%. The risk is that buying the highest-yielding stocks will generally leave Invesco High Yield Equity Dividend Achievers ETF concentrated in three types of stocks: utilities, financials, and out of favor/turnaround plays.
A $500 investment will buy around 24 shares of the ETF, which has a fairly high expense ratio of 0.54%. If you're attracted by the lofty yield, you'll want to think carefully about the way this ETF interacts with the rest of your portfolio. It might be best for long-term investors to pair it with another dividend ETF, which brings our list to the Schwab US Dividend Equity ETF.
NASDAQ: PEY
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3. Schwab US Dividend Equity ETF: Doing what you would do
Schwab US Dividend Equity ETF is by far the most complex ETF on this list. It starts by looking at stocks that have 10+ years of dividend increases, like both of the ETFs above. And then the real work starts.
Once Schwab US Dividend Equity ETF has its starting fishing pond, it creates a composite score for dividend stocks that includes cash flow to total debt, return on equity, dividend yield, and a company's five-year dividend growth rate. The 100 stocks with the best composite scores are included in the ETF. What's exciting here is that the Schwab US Dividend Equity ETF is basically looking for good businesses that are growing and provide a large yield backed by a growing dividend. That's basically what every dividend investor is looking for, too.
NYSEMKT: SCHD
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All of that screening work only costs you 0.06% on the expense-ratio side, but it also creates an attractive 3.8% yield and a fairly well-diversified portfolio. It's a good middle ground between the two ETFs above, with $500 buying roughly 18 shares.
Two out of three ain't bad
At the end of the day, buying just one of the ETFs above might not be the best choice. It might make sense to pick two, with one focused on providing a diversification base for your portfolio and the other layering on some extra yield. If you do only select one, however, the Schwab US Dividend Equity ETF is probably the middle ground choice.
