Investing in a dividend ETF at 40 and holding it until you’re 80 might seem straightforward, yet the fund that performs best over a year often falls short over a decade. Meanwhile, the one that excels in the long run tends to come with higher fees. So, it’s important to choose wisely.
When you commit to a dividend fund at 40, looking to draw from it at 80, that’s quite a long-term decision. Three solid options for this purpose include the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD), the WisdomTree U.S. Quality Dividend Growth Fund (NASDAQ:DGRW), and the iShares Core High Dividend ETF (NYSEARCA:HDV).
The price histories of these funds start in different years: HDV from March 2011, SCHD from October 2011, and DGRW from May 2013, and most of that time coincided with rising market conditions. The real concern is what strategies they rely on and what risks they face.
SCHD Focuses on Quality and Financial Stability
SCHD tracks the Dow Jones U.S. Dividend 100 Index, considering companies that have paid dividends for over a decade. Those that pass this initial screening are then assessed on their cash flow relative to debt, return on equity, dividend yield, and five-year dividend growth.
The cash-flow-to-debt ratio stands out, especially over longer periods. Companies that need to borrow to maintain dividends often cut them when credit tightens, so this screening method tends to favor more financially sound companies. Essentially, SCHD consists of firms that can consistently pay dividends from their operations.
According to its latest portfolio report, SCHD has around $95 billion in net assets. The sector allocations can change considerably since the fund rebalances based on a set formula, meaning investors receive what the rules dictate.
Distributions are issued quarterly, with amounts fluctuating. The latest payout was $0.27, which is up from $0.25 the previous quarter. Over the last 12 months, the total came to about $1.05 per share, with shares priced close to $33.
DGRW Selects Companies for Their Growth Potential
DGRW selects companies based on quality metrics (like return on equity and return on assets) alongside projected earnings growth, with current yield being a secondary consideration. The fund’s holdings are weighted by their fundamentals instead of their market caps, typically favoring technology and large, high-quality firms.
For those planning to hold for 40 years, this fund emphasizes increasing income. A company with rising earnings is more likely to continue raising its dividends, whereas a high yield might sometimes signal a declining stock price. DGRW sacrifices some present income with the expectation of long-term gains—a fundamental concept of a dividend ladder, which we discussed in a free guide.
The fund pays out monthly, though the amounts can vary significantly. For instance, in 2026, distributions ranged from $0.025 in January to $0.17 in September. If someone is budgeting around a fixed monthly income, they might find this variability quite frustrating. The expense ratio is 0.28%, the highest among the three funds.
HDV Provides More Immediate Income, but Less Diversification
HDV tracks the Morningstar Dividend Yield Focus Index. To be eligible, companies must receive a Morningstar economic moat rating, indicating a robust competitive advantage, as well as pass a financial health assessment. Afterward, it picks the highest-yielding stocks. The moat requirement is significant, as it filters out companies that might just have high yields because their businesses are declining.
The portfolio is somewhat concentrated, holding about 75 stocks predominantly in energy, healthcare, and consumer staples. This means income can heavily depend on oil prices and the patent cycles of drugs. While HDV offers a high yield, its sector focus makes it the least diversified of the three options, and it has a low fee of 0.08%.
Short-Term Rankings Can Be Misleading
| Fund | 1-Year | 5-Year | 10-Year | Net Expense Ratio |
|---|---|---|---|---|
| SCHD | 27% | 56% | 234% | 0.06% |
| DGRW | 13% | 79% | 278% | 0.28% |
| HDV | 22% | 77% | 157% | 0.08% |
These figures encompass total returns, including reinvested distributions, over equivalent periods.
SCHD shows the best returns in the short term but the weakest over five years, while DGRW displays the opposite trend—last for one year, yet first over five and ten years. If you were to base your decision purely on the past year, you might pick the fund that actually underperforms over the long haul.
For anyone looking to invest for 40 years, a one-year ranking isn’t particularly insightful. Even a ten-year perspective covers only a fraction of your investment horizon.
Fees Are Predictable Costs
Investors have to weigh their choices. DGRW may show the strongest ten-year performance but also carries the highest fees. SCHD, on the other hand, is the cheapest and excels in shorter time frames.
Fees accumulate since they are deducted from assets each year, and each fee reduces the base for future growth and reinvested dividends. In the short term, a slight percentage difference may not seem significant. However, over several decades, that small amount can add up, somewhat like compounding dividends working in your favor.
Over the last decade, the gains from DGRW have compensated for its higher fee. That said, there’s no way to predict whether that trend will continue. You can count on the fee being stable, but the outperformance is speculative. The best choice ultimately hinges on how much you trust in the continued effectiveness of the quality-growth selection method.
What to Consider for a 40-Year Investment
- The fund needs to endure. ETF sponsors can close or merge funds that don’t attract enough investment. Although SCHD’s asset base reduces that risk, no fund is guaranteed to be available for 40 years.
- The sponsor must maintain strategy consistency. Any changes in index, mergers with other funds, or fee modifications can alter what you invested in. It’s important to stay informed through all shareholder communications.
- The rules of the index need to remain relevant. HDV relies on ratings from Morningstar analysts, while DGRW depends on earnings forecasts, and SCHD focuses on consistent payment history. Each assumption relies on the market behaving as it does currently.
- You must weather market downturns. These funds’ performance records include sharp declines like the 2020 crash and the 2022 bear market but don’t cover long, drawn-out declines similar to those seen from 2000 to 2002 or the stagflation during the 1970s. Selling at the lowest point can quickly derail your investment plan.
Choosing the Right Fund for Your Needs
SCHD is a good fit for a 40-year-old seeking a core holding that prioritizes quality with a focus on debt awareness and holds the largest asset pool among the three. DGRW might be suitable for someone who can wait decades for income and is willing to accept a known, higher fee for a growth-oriented approach that has performed well over five and ten years. HDV is ideal for those looking for more immediate income and who are comfortable with concentrated sector exposure, plus it has the advantage of a low fee. No matter what you choose, sticking to your plan will only be effective if you can endure downturns that could be worse than anything seen in these funds’ past performances.
