ETFOptimize | High-performance ETF-based Investment Strategies

Quantitative strategies, Wall Street-caliber research, and insightful market analysis since 1998.


ETFOptimize | HOME
Close Window

What is the Best Dividend ETF?

etf stock dividend

Choosing the best dividend ETF for your needs can be a daunting experience. Moreso when one considers the number of options available to investors.

In saying that, some dividend ETFs stand head and shoulders above others, measured by their total return. In this case, the best dividend ETF is the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD), which has delivered a 233.34% total return over the last ten years, also beating the total returns of the S&P 500 over the same period.

A key reason for SCHD’s market-beating performance is that total return captures both capital gains and compound dividend reinvestment. So assuming the dividends paid by SCHD were reinvested into the fund is why it beat the S&P 500. The 10-year average dividend yield of the fund hovers around 3%, which, as a rule of thumb, is sustainable and lucrative.

SCHD is a rules-based ETF that attempts to track the returns of the Dow Jones U.S Dividend 100 Index. In practice, the fund invests in companies that issue safe and high-quality dividends, along with underlying strength in their fundamentals.

So let’s break down the rest of SCHD’s metrics to uncover why it’s a great pick.

Fees

SCHD’s expense ratio, or how much you’d pay yearly to have their funds in the ETF is very low compared to the sector median of ETFs in general. It stands at just 0.06 percent, compared with 0.48 percent.

So how much could you expect to pay if you invested in SCHD for thirty years? Assuming you started with $10,000 and added $1,000 to the ETF every month, with a yearly expected return of 9%, you’d table just $3,689.95 in fees at the end of thirty years. Note that this calculation is for price return only, and not factoring in dividend reinvestment.

The most popular dividend ETFs, like SCHD have expense ratios in the 0.06 percent ballpark. However, these expenses can be quite hefty when you look beyond the ETFs with the highest funds under management (FUM).

For example, the iShares Select Dividend ETF (NASDAQ: DVY) has an expense ratio of 0.38 percent, which is more than six times as much as SCHD’s. With DVY you’d pay $22,489.11 in fees at the end of thirty years, assuming the same contributions and expected returns, leaving you $18,799.16 more out of pocket in direct costs.

The biggest indirect expense, however, from investing in DVY over SCHD may come in the form of an opportunity cost, measured by the difference in compound annual growth rate (CAGR). For the last ten years, SCHD delivered a total return of 233.34%, while DVY returned 209.57%. No other dividend ETFs also beat SCHD in total return, making it its strongest drawcard.

Dividend and risk

If SCHD were a stock, it would be classified as a dividend achiever, as it has made 10 consecutive years of dividend payment increases. The ETF pays dividends quarterly, and its yield stands at 3.42% at the time of writing, thus giving it an annual dividend payout of $2.56. The most recent dividend for SCHD was paid in December last year.

If you had $200,000 to invest in SCHD, you’d receive around $6,920 in dividends at today's prices every year. 

And despite the market-beating return through farming a sustainable average yield of around 3%, the fund’s price has been relatively stable, with an annualized volatility of 18.67% compared to 22.13% for the sector median.

Getting in and out of the fund is also easy, thanks to it being extremely liquid. It has $46.85 billion in funds under management and a three-month average daily share volume of 3.36 million.

Holdings

Something to note with SCHD is that around half of its funds are invested in cyclical sectors of the economy, namely financials, industrials, and technology. Money rains down on companies in these sectors when times are good, but when times are bad, the inverse occurs. 

In saying that, some of the fund’s largest holdings are in defensive stocks like Coca-Cola (NYSE: KO), PepsiCo (NASDAQ: PEP), Home Depot (NYSE: HD), and pharmaceutical company Merck & Co Inc (NYSE: MRK), with around a 4% contribution each.

Since it’s apparent that the stock market’s longest bull market in history has ended or at least paused momentarily, it remains to be seen how SCHD will fare in a very different macro environment. Over the last decade, we have not seen the ugly side of these cyclical sectors.

Stock Quote API & Stock News API supplied by www.cloudquote.io
Quotes delayed at least 20 minutes.
By accessing this page, you agree to the following
Privacy Policy and Terms Of Service.


 

IntelligentValue Home
Close Window

DISCLAIMER

All content herein is issued solely for informational purposes and is not to be construed as an offer to sell or the solicitation of an offer to buy, nor should it be interpreted as a recommendation to buy, hold or sell (short or otherwise) any security.  All opinions, analyses, and information included herein are based on sources believed to be reliable, but no representation or warranty of any kind, expressed or implied, is made including but not limited to any representation or warranty concerning accuracy, completeness, correctness, timeliness or appropriateness. We undertake no obligation to update such opinions, analysis or information. You should independently verify all information contained on this website. Some information is based on analysis of past performance or hypothetical performance results, which have inherent limitations. We make no representation that any particular equity or strategy will or is likely to achieve profits or losses similar to those shown. Shareholders, employees, writers, contractors, and affiliates associated with ETFOptimize.com may have ownership positions in the securities that are mentioned. If you are not sure if ETFs, algorithmic investing, or a particular investment is right for you, you are urged to consult with a Registered Investment Advisor (RIA). Neither this website nor anyone associated with producing its content are Registered Investment Advisors, and no attempt is made herein to substitute for personalized, professional investment advice. Neither ETFOptimize.com, Global Alpha Investments, Inc., nor its employees, service providers, associates, or affiliates are responsible for any investment losses you may incur as a result of using the information provided herein. Remember that past investment returns may not be indicative of future returns.

Copyright © 1998-2017 ETFOptimize.com, a publication of Optimized Investments, Inc. All rights reserved.