Dividend investing at a time when the S&P 500 index is yielding a scant 1.2% is not easy. It is even more difficult if you are using exchange-traded funds (ETF) as your investment vehicle of choice.
But even then, there are options — and three of the most attractive right now are the Vanguard High Dividend Yield ETF (VYM 1.12%), SPDR Portfolio S&P 500 High Dividend ETF (SPYD 1.69%), and Schwab U.S. Dividend Equity ETF (SCHD 1.34%).
Here’s what you need to know about each if you have $2,000 (or even $2 million) to invest today.
1. What does the Vanguard High Dividend Yield ETF do?
One of the main reasons to buy an ETF is for the instant portfolio diversification. If that is important to you, then one of the best dividend-focused options will be the Vanguard High Dividend Yield ETF.
This fund starts out by looking at all dividend-paying stocks (after removing real estate investment trusts — or REITs — from contention). The list of dividend paying stocks is then ranked from highest dividend yield to lowest.
Making things super simple, the top half of the list (the ones with the highest yields) is what gets included in the ETF. The portfolio is then market-cap weighted, so the largest stocks have the greatest impact on performance.
Image source: Getty Images.
The portfolio currently contains over 500 stocks, which is on par with the S&P 500. But its yield is a far more attractive 2.7%. There are higher-yielding ETFs, but it really boils down to the way the Vanguard High Dividend Yield ETF is created.
It includes so many stocks that it has no choice but to dip down into lower-yielding fare, and that hurts the overall yield. However, if you lean toward diversification, this dividend-focused exchange-traded fund is a worthwhile alternative, or perhaps a complement, to the S&P 500 index.
2. What does the SPDR Portfolio S&P 500 High Dividend ETF do?
If you prefer to stick to the stocks in the S&P 500, there’s an option for you. Given that the stocks in the index are hand-selected to represent the broader U.S. economy, and they tend to be large and important companies, it makes sense that you might want to own something of this kind.
This is exactly what the SPDR Portfolio S&P 500 High Dividend ETF offers, coming in with a 3.9% yield. And it is just as simple to understand as the Vanguard High Dividend Yield ETF.
The SPDR fund lines up the stocks in the S&P 500 index by yield, from highest to lowest, and includes the 80 stocks with the highest yields. That said, the stocks are equally weighted so that each one has the same impact on performance.
The caveat here is that this approach tends to lead to large exposure to a small number of sectors, like financials and utilities. However, you know that these companies have been vetted by humans as being large and economically important, since they were included in the S&P 500. Once again, this could be the only high-yield ETF you buy, or it could complement other, more diversified holdings.
SCHD dividend yield, data by YCharts.
3. What does the Schwab U.S. Dividend Equity ETF do?
In the middle of the two above ETFs, in terms of yield, is the Schwab U.S. Dividend Equity ETF and its 3.3% yield. This high-yield dividend ETF is not simple to understand. In fact, it uses a fairly complex screening approach that attempts to balance yield with growth and company quality. While not an actively managed portfolio, it comes fairly close.
The first step in the screening process is to look at companies that have increased their dividends for at least a decade (once again, REITs are removed from consideration). A composite score is then created for each of the companies, looking at cash flow to total debt, return on equity, dividend yield, and the five-year dividend growth rate.
The companies with the 100 best composite scores make it into the Schwab ETF. Those 100 stocks are market-cap weighted. If you want more from an ETF than just a list of high-yield stocks, the Schwab U.S. Dividend Equity ETF will probably appeal to you.
Buy the approach that fits best with your personality
The nice thing about each of these ETFs is that their portfolios are updated regularly. So you can buy today, picking the one that makes the most sense to you, and hold forever.
It doesn’t matter how much you start with, either, be it $200, $2,000, or $200,000. Each of these ETFs will keep you invested in high-yielding stocks and allow you to focus on saving money to invest rather than trying to pick stocks and then track them over time.
These simple high-yield dividend options (although perhaps it’s not exactly appropriate to call the Schwab U.S. Dividend Equity ETF simple) can make your investment life easier and filled with a hefty dose of income.