While both categories technically fall under the "dividend" umbrella, investing in dividend growth stocks and high-yield stocks can produce very different results.
On one hand, long-term dividend growers tend to be very stable, mature companies that generate solid cash flows but little growth. High-yielders, on the other hand, are typically more cyclical in nature and rely on heavy cash-flow generation to support those bigger dividend payments.
With the economy and the markets looking like they're getting ready to shift, it's a good time to assess the outlook of the Schwab U.S. Dividend Equity ETF (SCHD 0.39%), a popular high-yield choice, and the ProShares S&P 500 Dividend Aristocrats ETF (NOBL 0.66%), a standard-bearer of long-term dividend growth.
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Quality high yield vs. long-term dividend growth
The Schwab U.S. Dividend Equity ETF is benchmarked to the Dow Jones U.S. Dividend 100 Index. It starts by identifying a universe of stocks that have paid dividends for at least 10 straight years. From there, it considers several fundamental metrics as well as dividend history to look for the best combinations of dividend growth, financial health, and yield. The final portfolio is weighted by market cap.
NYSEMKT: SCHD
Key Data Points
This fund has underperformed for the last three years as dividend payers fell out of favor during the tech and artificial intelligence (AI) boom. The portfolio of stocks is still solid, but it likely needs an environment where defensive, cyclical, and/or value stocks have a moment again. A 19% allocation to energy stocks, 18% to consumer staples, and just 8% to technology reflect how poorly the fund has been positioned for the recent rally. But it does indicate how it could turn around if the current market rotation continues.
The ProShares S&P 500 Dividend Aristocrats ETF tracks the S&P 500 Dividend Aristocrats® Index. (The term Dividend Aristocrats® is a registered trademark of Standard & Poor’s Financial Services LLC.) It targets companies from the big index that have grown their dividends annually for at least 25 consecutive years.
NYSEMKT: NOBL
Key Data Points
Most companies that have grown their dividends for this long aren't in fast growth mode anymore. They don't need to reinvest a huge chunk of their available capital back into the business. They've likely reached a mature stage where they can steadily reward shareholders. As such, this portfolio tends to be filled with "boring" companies, including top holdings Albemarle, Cardinal Health, and C.H. Robinson Worldwide.
Which ETF is the better buy?
There's a case to be made for both of these ETFs given their composition. The ProShares ETF could do particularly well if there's a broader risk-off shift in the markets due to its value orientation and tilt toward more defensive areas of the market.
My preference is still the Schwab U.S. Dividend Equity ETF. Its 3.7% yield, combined with a strategy focused on quality and dividend durability, is an ideal choice for any dividend seeker, whether they're looking for growth or yield. The fund's stellar track record in the first decade of its life demonstrates how well it can perform when conditions swing back in its favor again.
