Many dividend ETFs show at least one strong point, but some really stand out.
If you’re looking for dependable investment returns that can grow over time, dividend stocks are often the go-to choice. However, managing individual dividend-paying stocks can be more complicated than what many investors want to deal with. A collection of dividend stocks offered through exchange-traded funds, or ETFs, is a simpler alternative that typically provides similar benefits.
But here’s the thing—contrary to what many might think, not all dividend ETFs are created equal. Each of the major dividend ETFs has its own distinct strategy for selecting holdings, and this can significantly impact performance. In brief, some may just fit your investment style better than others.
Keeping that in mind, let’s explore two dividend-focused ETFs that are good picks for investors seeking income.
Consider Schwab US Dividend Equity ETF
The Schwab US Dividend Equity ETF has a yield of below 3.8%, which checks off a key box for many income-focused investors. Higher yields are available, but you won’t find them in similar quality ETFs. The fund currently includes major positions in companies like Chevron, AbbVie, and PepsiCo. It’s based on a partially weighted Dow Jones US Dividend 100 index, which suggests that while the fund allocates heavily to these companies, periodic adjustments do occur during quarterly rebalancing.
This ETF employs a somewhat unconventional index. Most others tend to be cap-weighted, but the core requirement here is consistent dividend payments, and the inclusion criteria aren’t limited to just dividend growth. The Dow Jones ranks eligible stocks based on cash flow and return on equity.
This approach has proven effective. It results in a mix of value stocks that may not be experiencing massive revenue growth but still deliver reasonable gains, mainly due to the overall quality of the index and the stocks in the fund. The Schwab fund has seen a remarkable 45% growth over the last five years, with more than 130% growth over the past decade.
And this doesn’t even factor in the reinvested dividends along the way, which can add another 60% to 70% to performance during these time frames. Considering the relative safety this fund offers, the trade-offs are quite appealing for income-investing individuals.
Consider Vanguard Dividend Appreciation ETF
With around $100 billion pooled from investors, the Vanguard Dividend Appreciation ETF has become the favorite in the dividend ETF space.
It’s easy to see why. Focused on reliable dividend-paying companies, the fund counts names like Broadcom, Microsoft, and JPMorgan among its biggest holdings, which have nearly doubled their quarterly payouts over the last decade. It has delivered on its promise of solid performance.
In that same period, the ETF’s price has skyrocketed by 186%, thanks in part to being among the few dividend-paying tech companies that have thrived due to the rise in cloud computing and artificial intelligence.
However, there’s a notable downside with this fund: its yield is relatively low. Currently sitting at just over 1.6%, it hasn’t exceeded 2% since 2018 when interest rates fell to historic lows. There are certainly better options out there.
The lower yield stems from how S&P selects stocks for the S&P US Dividend Growers Index. To make the cut, companies need to increase dividends for ten consecutive years, which excludes the 25% of stocks with the highest yields that might raise concerns about limited growth potential. It’s a fair selection method.
Still, it’s a solid choice for long-term capital gains, even if it doesn’t generate high immediate returns. It’s particularly suited for growth-focused blue-chip investors who may not mind the lack of immediate cash flow.
Avoid Vanguard High Dividend Yield ETF
If you’re seeking strong dividend returns, the Vanguard High Dividend Yield ETF is not the answer right now.
Ironically, this fund has underperformed in delivering the high yields expected of it, with an average 30-day yield of just about 2.5%. While the Schwab fund seeks quality companies that pay dividends, this one has not fared as well.
Prior to last year, the typical yields for this ETF hovered between 2.7% and 3.3%. However, major holdings like Broadcom and JPMorgan have plunged since late 2023, which has affected overall yield performance.
Being a cap-weighted index presents its own challenges. The biggest players often carry out most of the heavy lifting, which may not benefit all shareholders consistently.
That said, the yields from the Vanguard High Dividend Yield ETF aren’t necessarily worthless; the underlying FTSE High Dividend Yield Index is fundamentally sound. However, extraordinary market behavior in late 2023 has led to inflated prices, impacting yields. It could take some time to level out, and until then, there are more enticing dividend options available.
