There isn't and never will be a perfect dividend ETF, but there are several that are pretty darn good. The sheer number of dividend ETFs in the marketplace helps ensure that investors will have a fairly wide choice of great funds, but there are only a handful of ETFs that I consider elite.
Choosing a best or favorite fund requires some subjective opinion. What's important to one person won't be quite as important to another, but that's what stirs a great debate. No there's no right or answer, only personal preference.
What I want to talk about is MY favorite dividend ETF. This is the one that, in my opinion, is the best in the business.
Schwab U.S. Dividend Equity ETF (SCHD)
I talk often about what I call the three pillars of dividend investing - dividend growth, high yield and dividend quality. Most focus on one of the three disciplines. Some combine two of the strategies into one overall investment objective. Very few hit on all three.
SCHD falls into the last category. And that's why I'm a big fan.
Let's take a look at its stock selection criteria.
- At least 10 consecutive years of dividend payments
- Minimum $500 million market cap
- Best combination of cash flow to total debt, return on equity, dividend yield and 5-year dividend growth rate
- Selecting the 100 highest-yielding stocks among the universe of qualifying components
The fund also puts a 4.5% weighting cap on any individual components and a 25% weighting cap on any sector in order to help ensure diversification.
That's a pretty good set of criteria with which to build a portfolio.
Outperforming The S&P 500
And the strategy has worked. SCHD launched during the second half of 2011. Over its lifetime, it's managed to outperform the S&P 500 by a fair margin.
Before you look at the chart and think that outperformance isn't meaningful, consider that the past decade has been almost entirely driven by large-cap growth stocks. SCHD rates more as a low volatility value ETF and neither of those factors has been in favor over any appreciable length of time lately.
The fact that SCHD has been able to outperform while targeting out of favor stocks is even more impressive.
The ETF industry is known for its ultra-cheap expense ratios and SCHD is no exception. Its expense ratio of just 0.06% is one of the cheapest dividend ETFs you'll find and one of the cheapest in the industry period.
All of this makes SCHD ideal for just about any portfolio. Younger investors can use it as a core long-term holding. Retirees can use it for the conservative equity portion of their portfolios. Risk seekers can use it to balance out some of the volatility from the rest of their portfolio while not sacrificing returns. Dividend investors can use it to generate above average yields.
Many of you may come up with a difference choice for your top ETF and there are a lot of good cases to be made.
For me, the investment criteria, high yield, strong performance and low fees make SCHD the big winner.
More ETF Research
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