Are you looking to add an income-producing component to your current portfolio? There’s certainly no shortage of options. If you’re looking for simple, productive, and inexpensive choices, an ETF arguably makes the most sense.
But not just any ETF.
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While names like the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) or the Vanguard High Dividend Yield ETF (NYSEMKT: VYM) are respectable options, despite its 19% run-up from its early November low, the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is still your highest-yielding and most compelling prospect.
The key isn’t what it holds, but rather what it doesn’t hold.
One would think any exchange-traded fund with the word “dividend” in the name would be similar. However, that’s not the case.
Take the aforementioned Vanguard Dividend Appreciation ETF. It only holds stocks with a long-term track record of annual dividend payment growth, ignoring how much yield shareholders collect from the stocks. This particular Vanguard holds a bunch of technology growth stocks, including Broadcom, Apple, and Microsoft. They pay ever-growing dividends, but none of them actually offer a great deal of dividend income. Its trailing yield is a mere 1.6%.
Regarding the Vanguard High Dividend Yield ETF, it suffers from comparable but different structural limitations. Meant to mirror the FTSE® High Dividend Yield Index, Broadcom is also its biggest holding despite this stock’s forward-looking yield of just under 1%. Other major holdings, including JPMorgan Chase, ExxonMobil, and Walmart, are more along the lines of what you’d expect from such an index and fund. Even then, though, these blue-chip stocks’ persistent premium pricing means this fund’s trailing dividend yield is a modest 2.3%.
The Schwab U.S. Dividend Equity ETF, however, is distinctly different from both of these seemingly good alternatives. Based on the Dow Jones U.S. Dividend 100™ Index, it first and foremost requires strong dividend yields, and then only chooses 100 of these eligible names using important fundamental factors such as free cash flow and return on equity.
The result? Its holdings aren’t mostly technology names attached to the artificial intelligence revolution. This ETF’s biggest positions include Lockheed Martin, Verizon, and Coca-Cola — although being an equal-weighted fund, these names won’t remain the biggest positions after the end of the current quarter. These are boring non-tech companies, but they fulfill their first and foremost duty of generating good, reliable income. Even with the fund’s rally since early November, you’d be plugging into a healthy trailing yield of 3.4%.
