Investing is hard work. And the process doesn't stop once you've bought a stock because you have to keep tracking each investment you add to your portfolio. If you are looking for a way to simplify your investment life, consider exchange-traded funds (ETFs).
If you have an income focus, some of the best options today are Vanguard High Dividend Yield ETF (VYM 0.64%), Schwab U.S. Dividend Equity ETF (SCHD 0.07%), and, for more adventurous types, Amplify CWP Enhanced Dividend Income ETF (DIVO 0.58%). Here's a quick look at each one.
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1. Vanguard High Dividend Yield ETF is an alternative to the S&P 500 index
The S&P 500 (^GSPC 1.08%) is the de facto standard by which most investors track the market. Many investors simply buy an S&P 500 index-tracking ETF and call it a day. If you like dividends, however, the tiny 1.1% yield on offer from the S&P 500 will be a problem for you. Vanguard High Dividend Yield ETF offers you material diversification, like you'd get with an S&P tracker, but with more than twice the income stream, given its 2.4% yield.
NYSEMKT: VYM
Key Data Points
Vanguard High Dividend Yield ETF is fairly simple. The index it tracks takes all U.S. dividend-paying stocks and ranks them by yield. The highest-yielding 50% of the options get into the exchange-traded fund with a market-cap weighting. It currently has around 560 holdings. The financial sector has the largest weighting, at around 21% of assets, but it is fairly well-diversified thereafter. The expense ratio, meanwhile, is a very low 0.06%.
A $100 investment will only get you a fraction of a share, which most brokers will allow today. However, if you are starting out, this is a good option for dividend lovers focused on diversification. If you can't buy a fraction of a share, it may be worth saving up an additional $50 or so to purchase a full share.
2. Schwab U.S. Dividend Equity ETF is a tough screener
While Vanguard High Dividend Yield ETF takes a broad approach, Schwab U.S. Dividend Equity ETF goes the other way, owning just 100 stocks that pass a fairly complex screening process. This ETF starts out by only considering companies that have increased their dividends for at least 10 years (excluding real estate investment trusts). It then creates a composite score that looks at cash flow to total debt, return on equity, dividend yield, and a company's five-year dividend growth rate. The 100 top-ranked stocks get included in the ETF with a market-cap weighting.
That's a lot of moving parts, but the basic outcome is that Schwab U.S. Dividend Equity seeks to invest in financially strong companies that are well-managed and have high yields backed by growing dividends. That's essentially what most dividend investors are looking for, making this a solid option for anyone trying to simplify their dividend investing life. Add in a very modest 0.06% expense ratio and a very attractive 3.7% yield, and you can see why this ETF has attracted over $70 billion in assets.
NYSEMKT: SCHD
Key Data Points
The best part, however, is that Schwab U.S. Dividend Equity ETF has provided investors with a generally rising share price and a generally rising dividend over time. So you get capital appreciation and income from one diversified investment. You can buy around three shares with $100.
3. Amplify CWP Enhanced Dividend Income ETF is a covered call play
Options ETFs are all the rage today, with some of these ETFs offering unbelievable double-digit yields. Generally, those ultra-high yields come along with steadily declining share prices. If you are interested in an options income fund, you should probably err on the side of caution with an ETF like Amplify CWP Enhanced Dividend Income ETF. The yield is "only" 4.5%, but the value of the fund has risen steadily over time. So investors are getting an attractive income stream and capital appreciation.
Amplify CWP Enhanced Dividend Income ETF is an actively managed ETF, which is why its expense ratio is a bit high at 0.56%. Essentially, management selects a portfolio of around 30 dividend-paying stocks that it believes have strong businesses and attractive growth prospects. It then strategically sells covered calls to generate additional income. Covered calls are generally considered the lowest-risk option strategy you can engage in.
NYSEMKT: DIVO
Key Data Points
The caveat here is that the dividend will vary along with the success of management's covered call approach. A $100 investment will let you buy roughly two shares of Amplify CWP Enhanced Dividend Income ETF.
Three ways to play the dividend theme
The wonderful thing about ETFs is how they simplify your investing life. The problem with ETFs is that there are a lot of different investment options you can choose from, even if you are focused on just dividend investing.
The broadly diversified Vanguard High Dividend Yield ETF, the screen-based Schwab U.S. Dividend Equity ETF, and the option-driven Amplify CWP Enhanced Dividend Income ETF are three great starting options. They cover a wide range of dividend investing options, and they could even be combined into a single portfolio if desired.
