ETFs
The Best Dividend ETF to Invest $1,000 In Right Now
THE S&P500 The index is near its all-time highs, pushing the index yield down to only around 1.3%. You can get a return more than twice as high, at 3.4%, with Schwab U.S. Dividend Stock ETF (NYSEMKT: SCHD). But if you have $1,000 or more to invest right now, this ETF has a lot more to offer than just its yield.
You can get higher returns than the Schwab US Dividend Equity ETF
If all you care about is the dividend yield, you can easily find exchange traded funds (ETFs) that have higher yields. For example, SPDR Portfolio S&P 500 High Dividend ETF (NYSEMKT:SPYD) offers a yield of 4.4%. In absolute terms, that’s only a percentage point higher, but in percentage terms, it’s a huge increase in yield.
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But you can’t just look at dividend yields, especially when the market is near all-time highs. Specifically, the SPDR Portfolio S&P 500 High Dividend ETF essentially buys the 80 highest-yielding stocks in the market. the S&P 500 index.
While it’s true that the S&P 500’s components are carefully selected to represent the broader economy when added to the index, the best-performing stocks often include companies facing tough times, such as Hasbrowhich suffered a 9% year-over-year revenue decline in the first quarter of 2024 as it works to “transform” the company. That’s not to say Hasbro is a bad company, but it’s certainly not one that’s running at full capacity today.
The Schwab US Dividend Equity ETF does a different job of finding dividend stocks.
Notably, it doesn’t focus on dividend yield relative to anything else. It starts the process by looking for companies that have increased their dividends for at least 10 consecutive years. (Real estate investment trusts, or REITs, are eliminated from the selection process.) Looking at consistent dividend increases helps narrow the pool of companies to those that have had a successful business history and the financial strength to consistently increase their dividends.
Schwab US Dividend Equity ETF Goes Beyond Dividends
But steady dividend increases are just the beginning for the Schwab US Dividend Equity ETF. Once this pool of candidates is selected, it creates a composite score that takes into account both the performance and quality of the company.
Factors considered in the analysis include the cash-to-total-debt ratio, which is primarily intended to focus on financially strong companies. It adds return on equity, which helps identify companies that have good financial results. It ranks the five-year dividend growth rate, which is another way to highlight financial strength, but is specific to income-oriented investors. It then looks at dividend yield, which is clearly intended to highlight higher-yielding stocks and boost the ETF’s overall yield.
The story continues
Once the Schwab US Dividend Equity ETF has this composite score, it ranks the scores from best to worst. The top 100 companies are selected for the ETF and weighted by market capitalization. This way, the largest and most attractive companies will have the greatest impact on the ETF’s overall performance.
The end result is an ETF that offers an attractive yield and is backed by a roster of financially strong companies. This is a good thing to consider today because of the rapid rise in the stock market. Bull markets often lead investors to buy stocks indiscriminately, allowing weaker companies to post significant share price gains.
The Schwab US Dividend Equity ETF specifically attempts to weed out weak companies, placing investors in stocks that are likely to be better able to handle a market and/or economic downturn.
Yield alone is not the end of the story
There’s nothing wrong with buying stocks based on their dividend yield. But yield alone isn’t the best way to find good quality businesses: you need to look at more factors.
And that’s exactly what the Schwab US Dividend Equity ETF offers investors. If you want a mix of yield and quality as Wall Street hits new highs, while knowing that a bear market will eventually come, then the Schwab US Dividend Equity ETF might be the best place to put your money today.
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Ruben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Hasbro. The Motley Fool has a disclosure policy.
The Best Dividend ETF to Invest $1,000 In Right Now was originally published by The Motley Fool