Investing is not a one-size-fits-all situation, which is why there are many different investing approaches you can take. And yet, the common reference point for most investors is the S&P500 (INDEXSNP: ^GSPC) hint. Here’s a big problem for a retired investor in need of income who defaults to the S&P 500: the index’s dividend yield today is just 1.3%. It would be difficult for a dividend investor to make a living from this, which is why a better option would be Schwab US Dividend Stock ETF (NYSEMKT:SCHD)which has a yield of almost 3.5%.
There is nothing wrong with the S&P 500 index
Regarding the indexes, the S&P 500 Index is quite well constructed. For starters, it owns a large number of stocks, providing diversification. Stocks are selected based on their size and importance to the U.S. economy. These are therefore remarkable companies and not obscure companies. Stocks in the index are weighted by market capitalization, so the largest stocks have the most influence on the index’s performance. This is fairly representative of the real world and ensures that whoever owns the index invests more money in the best-performing stocks (which are usually, but not always, the largest).
But just because an index is well constructed does not mean it is the right index for every investor. As noted, the S&P 500 index yield is 1.3%. That’s a very small number, and it would require a huge investment to generate a significant level of dividend income if you simply owned an index tracking the S&P 500. exchange traded fund (ETF) like SPDR S&P 500 ETF Trust (NYSEMKT: SPY). A better bet would be to purchase an ETF focused on generating dividend income. A good option is the Schwab US Dividend Equity ETF, which offers a yield nearly three times what you’d get from an S&P 500 tracking ETF.
What does the Schwab US Dividend Equity ETF do?
Before you buy the Schwab US Dividend Equity ETF, or any ETF for that matter, you should look into the investment methodology. In this case, the ETF attempts to create a balance between quality and dividend yield. This is significantly different from an ETF like SPDR Portfolio S&P 500 High Dividend ETF (NYSEMKT:SPYD)which simply buys the 80 most profitable stocks in the S&P 500 index.
To get its final list of about 100 stocks, the Schwab US Dividend Equity ETF first removes real estate investment trusts (REITs). It then selects companies that have increased their dividends every year for 10 consecutive years. This is the basic list of investment candidates. For each of these potential investments, it creates a composite score using cash flow to total debt, return on equity, dividend yield and five-year dividend growth rate. Each company’s scores are ranked from best to worst, and the top 100 are those that make it into the Schwab US Dividend Equity ETF.
The end result is not an income-focused ETF per se, but one that attempts to ensure that investors own good companies with growing businesses and attractive returns. Overall, based on the investment approach, the Schwab US Dividend Equity ETF appears to be a very good option for most dividend investors who want a simple way to invest in dividend stocks. Pair this with a large-scale bond fund, perhaps like Vanguard Total Bond Market Index ETF (NASDAQ:BND), and you have a pretty solid foundation for a balanced portfolio. Notably, the Vanguard Total Bond Market Index ETF has a slightly higher yield of 3.3%. You could probably do better if you were willing to take on more fixed income risk.
Investment is not a one-size-fits-all solution
The S&P 500 Index is great, but it’s not the right investment option for every investor. For example, the S&P’s goal is simply to represent the economy as a whole, which won’t serve dividend investors very well. If you’re looking for income, an ETF like the Schwab US Dividend Equity ETF will likely be a better choice. It is specifically designed to meet the needs of dividend investors looking to own high-quality, growing companies that pay attractive dividends.
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Ruben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Bond Index Funds-Vanguard Total Bond Market ETF. The Motley Fool has a disclosure policy.
You can do better than the S&P 500. Buy this ETF instead was originally published by The Motley Fool
