There are very few investments in the world that are perfect in themselves. Most can benefit from pairing with others. This is particularly true in the exchange-traded fund (ETF) space, where many of these pooled investment products are designed to provide niche exposures.
This is even true with dividend ETFs like SPDR Portfolio S&P 500 High Dividend ETF (NYSEMKT:SPYD)THE Schwab US Dividend Stock ETF (NYSEMKT:SCHD)and the ETF Shares of Vanguard International High Dividend Yield Index Fund (NASDAQ:VYMI).
Let’s take a look at why you might want to invest $10,000 of unnecessary spare funds to pay monthly bills, bolster an emergency fund, or pay off short-term debt to buy stocks in all three. This will help you create a long-term core dividend portfolio.
1. SPDR Portfolio S&P 500 High Dividend ETF
The SPDR Portfolio S&P 500 High Dividend ETF consists of stocks found in THE S&P500 hint, a broad list of carefully selected and economically important large companies. The 80 best-performing stocks in the S&P are placed in this SPDR ETF and are equally weighted in the portfolio. That’s basically everything you need to know about building this exchange traded fund.
The ETF is heavily weighted to just three market sectors, all known for containing high-yielding stocks: real estate, utilities, and financials. Together, these three sectors represent almost two-thirds of the fund’s portfolio. This focus is a good reason why it should be paired with another U.S.-focused dividend ETF.
Despite the concentration (or perhaps because of it), it is difficult to find a higher yielding dividend stock ETF, given the methodology used. The dividend yield of the SPDR Portfolio S&P 500 High Dividend ETF is an attractive 4.4%. The management fees are very low, at 0.07%.
2. Schwab US Dividend Stock ETF
While the SPDR Portfolio S&P 500 High Dividend ETF focuses heavily on three sectors that are not known for rapid growth, the Schwab US Dividend Equity ETF’s approach specifically gears the ETF toward growth. It excludes real estate investment trusts (REITs) from inclusion, so there is little overlap on the real estate front. It specifically looks for companies that have increased their dividends every year for at least a decade, which tilts the portfolio in the direction of growth.
But after that, things get a little complicated. This Schwab ETF creates a composite score based on metrics such as cash flow to total debt, return on equity, dividend yield, and five-year dividend growth rate. Companies are ranked from best to worst based on their composite score, and the top 100 on the ranked list enter the ETF.
In short, the Schwab US Dividend Equity ETF attempts to strike a balance between yield, quality and dividend growth. The only significant sector overlap with the SPDR ETF is financial services, where this Schwab ETF invests approximately 17% of its assets. Other highly exposed sectors are healthcare (15% of assets), consumer staples (13%), industrials (13%), energy (12%) and consumer discretionary (10%).
This is an attractive complement to the higher yielding SPDR ETF. But don’t think that the Schwab ETF is a low-yielding ETF. The current dividend yield is a very attractive 3.4%. The spending rate is also very low at 0.06%.
3. ETF Vanguard International High Dividend Yield Index Fund
The first two dividend ETFs presented cover the US market very well, but what about the rest of the world? That’s where the Vanguard International High Dividend Yield Index Fund ETF comes in. This ETF starts with large- and mid-cap foreign stocks that pay dividends, strips out REITs, and then ranks stocks based on dividend yield. The top 50% of high-yielding stocks from the selected list go into the ETF. Although the mechanics are a bit more complicated than that, it’s the logic that’s important here.
The dividend yield is 4.7%. The expense ratio is a little higher than the other two but still reasonable at 0.22%. It is higher largely because it invests in foreign stocks. This higher ratio is acceptable because the real goal here is to increase diversification beyond U.S. borders. This ETF does it well since it does not invest in US stocks.
It’s also worth noting that this ETF has over 1,500 holdings, so it’s diversified in its own right. The largest regional exposure is Europe with almost 45% of assets, followed by Asia with 26% and emerging markets with 21%.
How much do you put in each?
If you combine these three dividend ETFs into one portfolio (using the aforementioned $10,000), you’ll own a fairly attractive and diverse mix of dividend stocks globally. The amount invested in each fund will depend on your personal goals, however, as those looking for a higher-yielding portfolio will likely favor the SPDR Portfolio S&P 500 High Dividend ETF and shares of the Vanguard International High Dividend Yield Index Fund ETF.
However, the growth and quality characteristics included in the Schwab US Dividend Equity ETF’s portfolio construction will remain important, as they will help increase diversification and offset the ravages of inflation. Of course, this is also why investors focused on dividend growth might make it the largest weighting in their portfolio.
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Ruben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the securities mentioned. The Mad Motley has a disclosure policy.
3 Dividend ETFs to Buy with $10,000 and Hold Forever was originally published by The Motley Fool
