Sometimes, investing just doesn't need to be that complicated. While a lot of investors and those in the financial media try to determine on a daily basis where the markets are headed and which sectors look the most attractive, finding a high quality ETF with a logical objective that you can simply buy and hold makes a lot of sense.
While we haven't seen it much over the past several years, dividend investing has proven to deliver above average returns over enough time. It's not nearly as exciting as investing in Tesla or bitcoin, but if you're goal is steadily building long-term wealth for retirement, college or almost any other goal, dividend stocks and ETFs should be a part of your portfolio.
According to ETF Action, 136 ETFs out of the nearly 2,500 ETF universe are deemed to have a dividend focus. That's a lot of choices! On top of that, there are a huge number of strategies within that group (growth, high yield, value, momentum, etc.) that make it that much more difficult to narrow it down to just a handful of potential winners.
If you're looking for the full list of 136 dividend ETFs ranked, I'd encourage you to check out the article I wrote recently that scores each dividend ETF according to a number of different criteria. This will certainly help you separate the best from the rest.
In the meantime, let's take a look at three dividend ETFs that implement high quality, logical investment strategies, rate as highly efficient and have long-term track records of success. Any one of these would fit nicely in your portfolio and give you a solid core portfolio position.
Vanguard Dividend Appreciation ETF (VIG)
Sometimes, the simplest strategies are the best. VIG is pretty straightforward. It targets stocks which have raised their dividend for at least 10 consecutive years, excluding REITs.
While dividend growers succeed in giving shareholders a pay raise each and every year, they're not really known for being high yielders. VIG has a current yield of just 1.6%, which exceeds the 1.3% yield of the S&P 500, but won't get income seekers very excited.
VIG is well-diversified, allocating at least 10% of assets to 6 different sectors, with tech, industrials and healthcare topping the list. Not surprisingly, it's less growth-oriented than the broader market and holds a combined 31% of assets in the combination of tech, communication services and consumer discretionary sectors (compared to about 50% in the S&P 500). It's relatively expensive at the moment as the portfolio's P/E, P/B and P/S ratios all at about 30% above their 5-year averages.
VIG is one of the cheapest ETFs in the entire marketplace, charging just 0.06% per year, and has delivered an average annual return of about 10% since its inception in 2006.
Schwab U.S. Dividend Equity ETF (SCHD)
SCHD is one of the best dividend ETFs out there if you want a little of everything. It combines high yield, long dividend histories and several quality screens.
All components of the fund's 100 stock index must have sustained at least 10 consecutive years of dividend payments (note: they don't have to have 10 consecutive years of INCREASED payments, just to have paid a dividend at all), have a minimum market cap of $500 million and meet minimum liquidity criteria. The index components are then selected by evaluating the highest dividend yielding stocks based on four fundamentals-based characteristics — cash flow to total debt, return on equity (ROE), dividend yield and 5-year dividend growth rate. REITs are also excluded from consideration.
In terms of valuation metrics, SCHD is comparatively cheaper relative to VIG, with those same ratios only coming in at 15% above their 5-year averages. SCHD is a little top-heavy with the top 10 holdings accounting for more than 40% of the portfolio overall. In terms of composition, SCHD is overweighted in cyclicals right now, so a return of the cyclical reflation trade should benefit this ETF a little more than others.
SCHD is also very cheap, charging just 0.06% annually, and its current yield of 3% even will likely attract the attention of equity income seekers.
ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
If targeting long-term dividend growers is your objective, NOBL will be the fund for you. In order to achieve the "dividend aristocrat" title, companies must have paid and increased their annual dividend for at least 25 years, while many are already working on 40-50 year streaks.
Much of what has already been said about VIG could be said here. NOBL actually provides a bit of a higher yield here, however, coming in at around 2.1%. The fund's composition looks considerably different than either of funds mentioned already. It has very little dedicated to growth sectors, including just 3% of assets dedicated to tech. It's heavily invested in cyclical and defensive sectors with industrials leading the way with a 25% allocation. Real estate is included in this fund and accounts for 5% of assets.
With an expense ratio of 0.35%, NOBL is actually on the pricier end of the spectrum. I'd, of course, prefer to see that number a little lower, but it hasn't prevented it from generating a 13% average annual return since its inception just under 8 years ago.
Dividend stocks and ETFs belong in virtually every portfolio. Most investor attention over the past several years has been centered around growth and tech, but that won't always be the case. If the global cyclical recovery continues to accelerate throughout the remainder of 2021, as many expect it will, value, cyclicals and dividend stocks can reasonably be expected to outperform. VIG, SCHD and NOBL fall into those categories and could be set up to perform relatively well over the next year or so.
These are likely better suited as long-term buy and hold investments though. If you add any one of these three funds to your portfolio and hold them for 10 or 20 years or even longer, it's unlikely you'll be disappointed.