Understanding Dividend ETFs for Passive Income
Many exchange-traded funds (ETFs) target dividend-paying stocks. For those looking to generate income, the options can be overwhelming, making it tough to determine the best choice.
The Schwab US Dividend Equity ETF and the Pacer Global Cash Cows Dividend ETF stand out among dividend ETFs. They’re worth considering for investors seeking passive income.
Strategies for High-Yield Dividend Stocks
The Schwab and Pacer ETFs both aim to deliver above-average dividend income through high-yield stocks. Each ETF typically contains around 100 stocks, employing various strategies for selection.
The Schwab ETF is based on the Dow Jones US Dividend 100 Index, which evaluates stocks on four main criteria:
- Cash flow to debt ratio.
- Profit margin of the stock.
- Specific dividend yield.
- Dividend growth rate over the last five years.
This index tends to select companies with stronger financial profiles, which can support sustainable and increasing dividends. The Schwab ETF’s annual restructuring revealed an average dividend yield of 3.8% and a five-year growth rate of 8.4%.
On the flip side, the Pacer ETF relies on different metrics, initially screening 1,000 stocks in the FTSE developed large-cap index for the top 300 companies with the best free cash flow yield over the past year. Ultimately, it selects the top 100 based on their yields, with weights assigned from highest to lowest. Recently, its average free cash flow yield for these holdings was 6.3%, while the dividend yield was about 5%.
Comparing the top holdings of these ETFs yields interesting insights.
|
Schd |
GCOW |
|---|---|
|
Conoco Phillips 4.4% |
Philip Morris 2.6% |
|
Cisco Systems 4.3% |
Engie 2.6% |
|
Texas Instruments 4.2% |
British American Tobacco 2.4% |
|
Altria Group 4.2% |
Equinor 2.2% |
|
Coca-Cola 4.1% |
Gilead Sciences 2.2% |
|
Chevron 4.1% |
Nestlé 2.2% |
|
Lockheed Martin 4.1% |
AT&T 2.2% |
|
Verizon 4.1% |
Novartis 2.1% |
|
Amgen 3.8% |
Shell 2.1% |
|
Home Depot 3.8% |
BP 2% |
It’s interesting to note that while SCHD focuses solely on U.S. companies, GCOW takes a more global stance, with U.S. stocks representing less than 25% of its holdings. Furthermore, SCHD prioritizes stock quality, whereas GCOW emphasizes dividend yield, resulting in a current yield of about 4.2% for GCOW, compared to 3.9% for SCHD.
Cost and Returns Comparison
These ETFs are both geared toward high-yield dividend stocks, yet their selection processes significantly affect their performance and cost. SCHD operates as a passively managed fund with a much lower expense ratio of just 0.06%, while GCOW has a higher rate of 0.6%. So, for an investment of $10,000, you’d see an annual fee of $60 for GCOW, versus only $6 for SCHD.
The higher fees for GCOW can nibble at the revenue the fund generates, potentially impacting its long-term profitability. Although GCOW’s dividends yield around 4.7%, its recent holdings imply a yield of only 4.2%.
|
ETF |
1 Year |
3 Years |
5 Years |
10 Years |
Since Inception |
|---|---|---|---|---|---|
|
GCOW |
11.2% |
8.4% |
15.5% |
n/a |
8.8% |
|
SCHD |
3.8% |
3.7% |
12.2% |
10.6% |
12.2% |
Interestingly, while GCOW has outperformed SCHD over the past five years, SCHD has consistently shown solid long-term performance thanks to its focus on companies with low costs and growing dividends.
Why SCHD is a Strong Option for Passive Income
Both SCHD and GCOW cater well to investors searching for passive income through high-yield dividend stocks. However, SCHD might be the better option because of its emphasis on sustainable and growing dividends, not to mention its significantly lower costs. This makes it more likely to deliver an attractive and progressively increasing stream of passive income for investors.
