The S&P 500 (^GSPC 0.05%) index is currently offering a skinny little 1.2% dividend yield. Meanwhile, Schwab U.S. Dividend Equity ETF (SCHD +0.07%) has a yield of 3.8%, and SPDR Portfolio S&P 500 High Dividend ETF (SPYD 0.26%) has a yield of 4.4%. These two dividend-focused exchange-traded funds (ETFs) do very different things, which actually makes them an interesting pair to buy together. Here's what you need to know.
What does Schwab U.S. Dividend Equity ETF do?
Schwab U.S. Dividend Equity ETF's portfolio contains 100 stocks that pass through a fairly strict screening process. The first step is to eliminate real estate investment trusts (REITs) -- more on this in a second. The second step is to focus only on companies that have increased their dividends for at least a decade. The third step is to create a composite score for each company that's still under consideration. That score includes looking at cash flow to total debt, return on equity, dividend yield, and a company's five-year dividend growth rate. The 100 top-rated companies are included in the ETF using a market-cap-weighted system, so the largest companies have the greatest impact on performance.
NYSEMKT: SCHD
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Without getting too deep into the woods, Schwab U.S. Dividend Equity ETF is basically trying to find good businesses that are growing and provide large yields backed by growing dividends. It's basically what most dividend investors would do if they were picking stocks, and the expense ratio is a tiny 0.06%. Over time, the approach has resulted in a generally rising dividend and a generally rising share price.
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What does SPDR Portfolio S&P 500 High Dividend ETF do?
By comparison, SPDR Portfolio S&P 500 High Dividend ETF is super simple. It buys shares of the 80 highest-yielding stocks in the S&P 500 index. It uses an equal-weight methodology, meaning every company has the same impact on performance. This is actually a safety tool, since no single stock will cause more harm to the ETF's performance than any other. The expense ratio is 0.07%. There are some important facts to think about here.
First, the fishing pool is the S&P 500 index. That's a list of the largest and most economically important U.S. companies selected by a committee. By using this index, SPDR Portfolio S&P 500 High Dividend ETF is limiting itself to fairly well-regarded businesses, generally speaking. Second, by selecting the highest dividend-yielding stocks from the index, the ETF is going to inherently end up focused on a few types of businesses. The utility, real estate, and finance sectors will almost always be prominent. But also included in the mix will be out-of-favor stocks, which provide some turnaround appeal to the portfolio. That's not good or bad, per se, but it is something to keep in mind.
NYSEMKT: SPYD
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Buy these two ETFs as a pair
You could buy either of these ETFs alone and hold them for the rest of your life, and you'd probably be just fine. But if you put them together, they cover more dividend ground. REITs are an excellent example because Schwab U.S. Dividend Equity ETF specifically avoids them, but SPDR Portfolio S&P 500 High Dividend ETF doesn't. That same thing is generally true with utilities and financials, as well. The key is that SPDR Portfolio S&P 500 High Dividend ETF emphasizes high yields, while Schwab U.S. Dividend Equity ETF focuses on growing businesses with attractive yields.
You have to accept a slightly lower yield with Schwab U.S. Dividend Equity ETF, but the dividend growth it offers should help you keep up with the ravages of inflation. Meanwhile, the higher yield from SPDR Portfolio S&P 500 High Dividend ETF will help provide you with the income you desire right now. And since they don't inherently overlap in their approaches, you aren't unknowingly doubling down on any one approach.
If you split yourself 50/50 between the two, you'll come pretty close to generating the 4% yield that many dividend investors target. If you have $2,000, that means $1,000 in Schwab U.S. Dividend Equity ETF, which will get you around 37 shares at current prices, and $1,000 in SPDR Portfolio S&P 500 High Dividend ETF, which will net you around 23 shares. The best part is that this simple two-ETF dividend portfolio won't cost you a lot of money, and it will save you a huge amount of time and energy. That way, you can spend your retirement enjoying life instead of fretting about the stock market.
