Many investors purchase mutual funds for their long-term investments. These funds are managed by professional fund managers, with years of experience.
However, most mutual funds underperform. According to the S&P Indices versus Active (SPIVA) scorecard, 79% of active fund managers underperformed the S&P in 2021. And this isn’t an aberration. It’s the twelfth year running that active fund managers have underperformed the S&P 500.
The average expense ratio of mutual funds ranges from 0.5% to as high as 2.5% – which investors pay regardless of performance. Over time, this can eat into your returns.
So is there a better alternative?
ETFs – The exceptional alternative to mutual funds
An exchange-traded fund (ETF) is a type of pooled investment security that operates much like a mutual fund. Typically, ETFs will track a particular index, sector, commodity, or other assets.
Since ETFs are passively managed, they are lower in fees, with an average expense ratio of only 0.2%.
In addition, unlike mutual funds, ETFs can be purchased or sold on a stock exchange.
In a nutshell, ETFs
- Offers broad diversification for your investment portfolio
- Can be easily traded via an exchange
- Have low expense ratios and operating costs
- Are usually more tax efficient
3 High-Dividend ETFs To Consider For Your Income Portfolio
Now that you have an idea what an ETF is, we’re going to highlight 3 dividend ETFs that we think are among the cream of the corp. Because not only do they pay out good dividends, they are also broadly diversified, giving you stability and predictability.
In these summaries, we look at some key metrics across each fund. These include:
- Top holdings
- Dividend history
- Expense ratio
Schwab U.S. Dividend Equity ETF (stock symbol SCHD)
Schwab U.S. Dividend Equity ETF tracks the Dow Jones U.S. Dividend 100 Index – a market-cap weighted index of 100 dividend paying U.S. equities. Launched in October 2020, its holdings, like those of the underlying benchmark index, are weighted according to their respective market capitalizations.
With more than $42 billion in assets, SCHD is largest of the two ETFs benchmarked against the Dow Jones U.S. Dividend 100 Index and traded on U.S. exchanges. It is also the best-performing. Around 80% of its weightings are held within the following sectors:
- Financial Services (20.55%)
- Industrials (16.86%)
- Technology (15.65%)
- Consumer Defensive (13.87%)
- Healthcare (12.87%)
Currently, its top holdings by weight within the fund are:
| Company | Stock Symbol | Weight |
|---|---|---|
| Merck & Co., Inc. | MRK | 4.52% |
| Amgen Inc. | AMGN | 4.42% |
| International Business Machines Corporation | IBM | 4.36% |
| Cisco Systems, Inc | CSCO | 4% |
| Texas Instruments Incorporated | TXN | 3.98% |
| The Home Depot, Inc | HD | 3.97% |
| PepsiCo, Inc. | PEP | 3.95% |
| Pfizer Inc | PFE | 3.94% |
| Broadcom Inc | ACGO | 3.84% |
| Lockheed Martin Corporation | LMT | 3.81% |
The total expense ratio of SCHD is just 0.06% or 60 cents for every $1,000 invested.
The dividend payout for SCHD have also been increasing steadily over the years.
Its annual dividends per share growth is nothing but impressive, rising from $0.81 in 2012 to $2.25 in 2021. This represents an average annual dividend growth of about 12.02%.
SCHD trades at $76.94 today with a current yield of 3.36%.
iShares Select Dividend ETF (Stock Symbol DVY)
iShares Select Dividend ETF tracks the Dow Jones U.S. Select Dividend Index. DVY offers exposure to the US high-dividend space that skews toward smaller firms paying consistent dividends
With more than $22 billion under management within the fund, DVY is ranked #6 in the U.S. News evaluation of 122 large-value ETFs. Though it is considered a highly diverse fund, it is still, however, geared towards Financial Services (22.07%) and Utilities (24.68%) – That’s close to 50% of its assets within these two sectors.
Other notable sector holdings include:
- Consumer Defensive (9.95%)
- Energy (9.66%)
- Consumer Cyclical (7.58%)
- Healthcare (6.25%)
The top 10 individual assets held within the fund are:
| Company | Stock Symbol | Weight |
|---|---|---|
| Valero Energy Corporation | VLO | 2.59% |
| Gilead Sciences, Inc. | GILD | 2.42% |
| International Business Machines Corporation | IBM | 2.18% |
| Altria Group Inc | MO | 2.14% |
| Exxon Mobil Corporation | XOM | 2.13% |
| ONEOK, Inc | OKE | 1.95% |
| Philip Morris International Inc. | PM | 1.79% |
| Principal Financial Group, Inc | PFG | 1.73% |
| Marathon Petroleum Corporation | MPC | 1.71% |
| Merck & Co., Inc. | MRK | 1.71% |
The total expense ratio of DVY is 0.38% ─ around six times higher than that of SCHD.
DVY’s dividends have also been increasing over the years at an average increment of 7.22% per year.
DVY trades at $122.24 today with a yield of 3.33%.
Vanguard Dividend Appreciation Index Fund (Stock Symbol VIG)
Vanguard Dividend Appreciation ETF tracks the S&P U.S. Dividend Growers Index. This index include stocks that have increased their dividends for at least 10 years consecutively. However, it excludes the top quarter of the highest-yielding companies from the index. Consequently, its dividend yield is below that of both SCHD and DVY.
Vanguard is a highly respected investment house, and VIG is the largest of the three funds that we’ve discussed today. With more than $72 billion in assets under management. VIG has a similar sectoral mix to that of SCHD:
- Financial Services (20.29%)
- Healthcare (16.47%)
- Technology (15.69%)
- Industrials (15.27%)
- Consumer Defensive (14.12%)
Its top 10 holdings are:
| Company | Stock Symbol | Weight |
|---|---|---|
| United Health Group Incorporated | UNH | 4.41% |
| Johnson & Johnson | JNJ | 3.88% |
| Microsoft Corporation | MSFT | 3.39% |
| JPMorgan Chase & Co. | JPM | 3.13% |
| Visa Inc. Class A | V | 2.78% |
| Procter & Gamble Company | PG | 2.76% |
| Home Depot, Inc. | HD | 2.61% |
| Mastercard Incorporated Class A | MA | 2.39% |
| PepsiCo, Inc. | PEP | 2.12% |
| Coca-Cola Company | KO | 1.98% |
VIG’s expense ratio is only 0.08%.
It’s dividend growth is nonetheless, pretty impressive, going from $1.41 dividend per share in 2012 to $2.66 in 2021. This represents an average CAGR of about 7.31% per year.
At the time of writing, VIG is trading at $153.91 with a dividend yield of 1.94% – which is about in line with the 1.82% yield on the S&P 500 Index.
Total Returns
While you might be investing to receive dividend income, it’s important to consider other metrics as well as the dividend yield and dividend growth. One of these is the total return ratio. This provides an overarching view of the performance of an asset as if the dividends and any capital gains distributions had been reinvested.
The annual total return history of these three ETFs compare as follows:
We have highlighted the best performer in each year in yellow and the worst in pink
In uncertain, turbulent markets, dividend stocks typically perform better than non-dividend paying stocks. Though each of these ETFs has a different bias – each tracking a different index – they share many features in common.
- They have growth potential for capital gains – wealth compounder
- They increase their dividends every year – more income for you
- They offer diverse range of stocks to protect your portfolio
- They have low fees
Selecting which ETF to invest in depends on your specific investment goals as well as the sectors you believe will do best. As always, do your due diligence before you invest.