Dividend stocks offer multiple benefits for retail investors: in addition to providing a steady stream of passive income which can be reinvested to boost portfolio performance, dividends are usually a signal that a company has strong stability. Companies focused on growth—or struggling to manage one or more elements of their business operations—are typically not in a position to pay money out to investors in the form of dividends.
When selecting a dividend stock, investors often look to factors including dividend yield and payout ratio or to a history of boosting dividend payouts as indicators of a winning choice. Still, even the most established dividend-paying firms can sometimes face unexpected turmoil or otherwise have reason to reduce or eliminate payouts. As is often the case in equities investing, targeting a broader group of dividend stocks can help to minimize this risk, as well as overall performance risk. Dividend stock ETFs are an excellent way to generate income over time.
SCHD: All-Around Dividend Stock Strength
The Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD) is a well-rounded and competitively priced dividend ETF. It targets a portfolio of around 100 large-cap U.S. firms that are selected based on their long history of paying dividends. The fund also factors in elements including yield and dividend growth, helping to ensure that companies included in the portfolio have fundamentals to support continued dividend strength going forward. SCHD's top holdings include dividend stalwarts like Cisco (NASDAQ: CSCO) and Home Depot Inc. (NYSE: HD).
With more than $63 billion in assets under management and a one-month average trading volume of about 11 million, SCHD is liquid and unlikely to cause investors to incur unexpected trading fees, making it ideal for more active traders. Additionally, the basket is not overweighted toward a small number of top stocks but reaches a limit of around 4.4% allocation for any individual company, ensuring it is broadly diversified.
VYM: Diversification and Value Stocks
Like SCHD, the Vanguard High Dividend Yield Index ETF (NYSEARCA: VYM) also focuses on large-cap U.S. stocks, but its approach is distinguished by the size of its portfolio and its emphasis on dividend yield. VYM has more than five times as many holdings as SCHD, with over 500 stocks in its portfolio. These firms are selected based on dividend yield and value characteristics.
Large-cap, dividend-paying value companies are often seen as highly stable, making VYM an excellent choice for a diversified dividend ETF for buy-and-hold investors. Its diversification is also a standout characteristic, making this fund even more attractive for investors looking for steady passive income.
VIG: Growth Stocks With Dividend Increase History
Another large-cap U.S. fund, the Vanguard Dividend Appreciation ETF (NYSEARCA: VIG), has a slightly different focus from VYM above. Rather than target stocks with an appealing value proposition, VIG seeks firms with the potential for future growth. Another key consideration for selection in VIG's portfolio is dividend payout growth. To be included, a company must have a history of at least 10 consecutive years of annual dividend increases.
VIG's portfolio of about 340 stocks is also widely diversified, although not quite as broad as VYM above. A couple of heavy-hitting tech stocks—Apple Inc. (NASDAQ: AAPL) and Broadcom Inc. (NASDAQ: AVGO)—are slightly more heavily weighted but still come in at under 5% of total assets.
An Array of Dividend ETFs
There are dozens of dividend stock ETFs currently available, giving investors no shortage of options. These funds offer a surprising array of different strategies, from broad-based approaches like SCHD above to a highly specialized focus on a single metric (such as dividend yield). They also differ in portfolio makeup, including multiple market capitalization categories, geographic specializations, and more.
The three ETFs above all share an expense ratio of 0.06%. While this is not the lowest fee across the dividend ETF space, it is highly competitive. Further, they all enjoy strong asset bases and performance histories, making each a good general dividend ETF. Investors looking for a niche dividend ETF product may wish to explore the space further, though they should be prepared to pay more for a targeted fund.
