ETFs
What is the best dividend ETF?
The iShares Core High Dividend ETF (NYSEARCA:HDV) and the Schwab US Dividend Equity ETF (NYSEARCA:SCHD) are two popular dividend ETFs from blue-chip sponsors. Both are cost-effective options with low expense ratios and offer portfolios of well-known stocks. dividend stocksand offer dividend yields between 3.5% and 3.7%. In this article, we’ll review what sets these ETFs apart and which one is the best choice for dividend investors.
What is the strategy of the HDV ETF?
According to iShares, HDV invests in “an index of U.S. stocks that pay relatively high dividends.”
The fund invests in “established, high-quality U.S. companies” and gives investors “access to 75 domestic dividend-paying stocks that have been screened for financial health.”
What is the SCHD ETF strategy?
According to Charles Schwab, SCHD invests in an “index focused on the quality and sustainability of dividends.” SCHD “invests in stocks selected for their fundamental strength relative to their peers, based on financial ratios.”
Portfolio analysis
HDV holds 75 stocks and its top 10 holdings make up 57.9% of its portfolio, so the fund is somewhat concentrated. Below is an overview of HDV’s Top 10 Holdings using TipRanks’ Asset Management tool.
HDV’s main titles include a wide range of Smart Scores. Smart Score is a quantitative stock rating system created by TipRanks. It assigns stocks a score from 1 to 10 based on eight key market factors. A score of 8 or higher equates to an outperformance rating. Nine of HDV’s top 10 holdings receive Smart Scores equating to outperformance of 8 or higher, and its four largest holdings, ExxonMobil (New York Stock Exchange: XOM), Chevrons (New York Stock Exchange: CVX), Johnson & Johnson (New York Stock Exchange: JNJ), and Verizon (New York Stock Exchange: VZ) boast of achieving “Perfect 10” Smart scores.
HDV’s holdings also have attractive collective valuations. According to iShares, they have an average price-to-earnings ratio of 16.4, which is only two-thirds of the valuation of the broader market, such as the S&P 500 (SPX) is currently trading at 24 times earnings.
SCHD is a bit more diversified and a bit less concentrated than HDV. It holds 100 stocks and its top 10 holdings represent 40% of its assets. Below is a snapshot of SCHD’s Top 10 Holdings using TipRanks’ Asset Management tool.
Seven of SCHD’s top ten holdings have Smart Scores equal to Outperform, which is a respectable total, but HDV has the edge in this area.
HDV and SCHD share a handful of top-10 holdings in common, including Verizon, Chevron, AbbVie (New York Stock Exchange: ABBV) and Coca Cola (New York Stock Exchange: KO). SCHD’s holdings are also remarkably similar in valuation to HDV’s, with its portfolio trading at a price-to-earnings ratio of 16.1 (as of May 31), so both funds offer a real discount to the broader market.
The story continues
HDV’s portfolio includes a higher number of stocks with Smart Scores equivalent to Outperform, but SCHD is slightly more diversified and slightly less concentrated. Essentially, these portfolios are quite similar and have remarkably similar valuations.
Similar dividends
The funds also have remarkably similar dividend yields. SCHD has a dividend yield of 3.7% and has been paying a dividend and increasing the amount of its payments for 12 consecutive years. HDV reports 3.5% and has also paid a dividend for 12 consecutive years, but has only increased its payout for two consecutive years.
Additionally, SCHD has increased its payments at a high CAGR of 11.8% over the past five years, while HDV has increased its payments at a much lower CAGR of 4.5%.
Although the funds have similar yields, SCHD is the winner in this category due to its better dividend growth.
Let’s look at their long-term returns
It is also important to see how these two Dividend ETFs Long-term returns are excellent. Over the past three years, HDV has posted an annualized return of 7.8% (as of May 31), which is actually better than SCHD’s three-year annualized return of just 4.2% (as of the same date)
However, looking back over a longer five-year period, SCHD significantly outperforms HDV, with an annualized total return of 13.4% versus HDV’s return of 8.3% (as of May 31).
SCHD also significantly outperformed HDV on a 10-year basis, with an annualized total return of 11.0% versus HDV’s more modest 10-year return of 7.9% (as of May 31).
So while HDV has performed better in recent times, SCHD has performed better over the past five and ten years, making it the clear winner in terms of long-term returns.
Cost-effective options
Both of these funds are great choices for investors because of their low fees. HDV’s expense ratio is just 0.08%, meaning an investor in the fund will pay just $8 in fees on an annual investment of $10,000. SCHD is even cheaper, with an expense ratio of 0.06%, meaning an investor investing the same amount in SCHD will pay just $6 in fees per year.
Assuming each fund returns 5% per year going forward, an investor placing $10,000 in HDV will pay $105 in fees over 10 years, while an investor in SCHD will pay only $77.
Both of these options are profitable for investors, and with such low fees, the difference is quite negligible. However, SCHD has a slight edge in this category.
Is HDV stock a buy, according to analysts?
As for Wall Street, HDV gets a Moderate Buy consensus rating based on 53 Buys, 21 Holds and two Sells assigned over the past three months. HDV stock average price target of $121.47 implies an upside potential of 12.1% from current levels.
Is SCHD Stock a Buy, According to Analysts?
SCHD also gets a Moderate Buy consensus rating based on 48 Buys, 46 Holds and seven Sells assigned over the past three months. SCHD stock average price target of $86.27 implies an upside potential of 11.4% from current levels.
Choosing a winner
These two ETFs have similar dividend yields, similar 12-month increases according to analysts’ average forecasts, and similar expense ratios. While they have some differences, the two portfolios trade at remarkably similar valuations.
HDV has outperformed SCHD over the past few years, but SCHD has significantly outperformed HDV over the past five and ten years. This long-term outperformance, combined with SCHD’s superior dividend growth, makes it the better choice for investors in my view. While I am neutral on HDV, I am bullish on SCHD because of its dividend yield, dividend payout growth history, and attractive dividend growth rate.