When considering long-term returns, income investors typically have two main choices: dividend stocks or dividend exchange-traded funds (ETFs). Dividend stocks can provide more stability, especially when focusing on those with a long track record of consistent dividend growth and solid yields. Choosing these stocks gives investors a clear idea of what to expect in terms of dividends and their potential growth.
However, I tend to lean toward dividend ETFs for a few reasons. Since they allow investors to buy a collection of stocks rather than putting all eggs in one basket, the dividends can be a bit more variable. Additionally, the stocks that make up that ETF can shift depending on what’s happening with the underlying index or the fund manager’s decisions in actively managed funds.
I find the extra uncertainty worthwhile for the sake of diversification. With dividend ETFs, the risk isn’t as concentrated as it is with individual stocks. If something disastrous happens to one company in your portfolio, it can really hurt your investments. On the other hand, a dividend ETF helps minimize that risk by spreading it out across various stocks.
There are many great dividend ETFs out there. The three I’ll mention are geared toward long-term investors, but each takes a different angle. Let’s explore the Schwab US Dividend Stock ETF (SCHD), State Street SPDR S&P Dividend ETF (SDY), and iShares Core Dividend Growth ETF (DGRO).
1. Schwab US Dividend Stock ETF
SCHD is quite popular, boasting a total asset value of $98.65 billion. It tracks the Dow Jones US Dividend 100 Index, which features 100 high-dividend stocks from the U.S. But, it’s important to note that this index excludes real estate investment trusts (REITs), so if you’re looking to invest in those, you might need to explore other options.
Currently, the top five holdings include United Health Group, Merck, Home Depot, Abbott Laboratories, and Procter & Gamble. No single company dominates the portfolio, weighing in at above 4.5%. Additionally, SCHD is diversified across different sectors, with consumer staples leading at 19.4%.
With an expense ratio of just 0.06%, that means you’d pay about $6 annually for every $10,000 you invest. Over the past year, SCHD’s stock price has risen by 19.4%, and if you include the dividends, the total return jumps to 24.7%.
2. State Street SPDR S&P Dividend ETF
The SDY is another solid option for income-seeking investors, though its emphasis leans more toward companies that have demonstrated a long history of dividend growth. While this might appeal to those seeking safety, the returns might not measure up to SCHD.
This ETF tracks the S&P High Yield Dividend Aristocrat® Index, showcasing the highest yielders within the S&P Composite 1500 Index, specifically companies that have raised their dividends for at least two decades. The term “Dividend Aristocrat®” is a trademark owned by Standard & Poor’s Financial Services LLC.
One of its notable holdings is Realty Income, known for its monthly dividends, making up 2.1% of the fund, followed by Verizon Communications, Kimberly Clark, Kenview, and Automatic Data Processing. The industrial sector comprises 18.8% of SDY, followed by essential goods (16.5%), utilities (14.6%), and finance (13.3%).
With $21.85 billion in assets and an expense ratio of 0.35%, SDY comes in slightly pricier than SCHD. It contains 156 stocks and recorded a return of 11.7% last year, with a total return—accounting for dividends—of 16%.
3. iShares Core Dividend Growth ETF
DGRO employs a buy-and-hold strategy focused on companies with significant potential to grow their dividends over time, rather than those with high current yields. It tracks the Morningstar U.S. Dividend Growth Index, which includes U.S. firms that have consistently paid dividends for at least five years and maintain a payout ratio below 75%.
DGRO manages roughly $42.28 billion, making it the most diversified among these ETFs with 390 holdings. Its top asset is Johnson & Johnson, representing 3.2% of the portfolio, closely followed by J.P. Morgan Chase, AbbVie, Apple, and Microsoft. In terms of sector weight, financial stocks lead at 20.8%, followed by healthcare at 18% and information technology at 16%.
DGRO features an expense ratio of 0.08% with a one-year return of 18.8%. Total returns, including dividends, come in at 22.3%.
