There are few investments in the world that are perfect in themselves. Most can benefit from being paired with others. This is especially true in the universe of Exchange Traded Funds (ETFs), where many of these pooled investment products are designed to provide niche exposure.
That even applies to dividend ETFs like the SPDR Portfolio S&P 500 High Dividend ETF (NYSEMKT: SPYD)the Schwab US Dividend Equity ETF (NYSEMKT: SCHD)and the Vanguard International High Dividend Yield Index Fund ETF Shares (NASDAQ: VYMI).
Let’s look at why you might want to use $10,000 of available funds not needed for monthly bills, bolster an emergency fund, or pay off short-term debt to buy shares in all three. Doing this will help you build a long-term core dividend portfolio.
1. SPDR Portfolio S&P 500 High Dividend ETF
The SPDR Portfolio S&P 500 High Dividend ETF is composed of shares from the S&P500 index, a broad list of carefully selected large and economically important companies. The 80 highest-yielding stocks in the S&P are placed in this SPDR ETF and receive an equal weighting in the portfolio. That’s really all you need to know about the construction of this exchange-traded fund.
The ETF is heavily weighted toward just three market sectors that are all known for high-yield stocks: real estate, utilities and finance. Together, these three sectors make up almost two-thirds of the fund’s portfolio. This concentration is a good reason to combine it with another US-focused dividend ETF.
Despite the concentration (or perhaps because of it), it’s difficult to find a dividend stock ETF with a higher interest rate given the methodology used. The dividend yield of the SPDR Portfolio S&P 500 High Dividend ETF is an attractive 4.4%. The management fee is a very low 0.07%.
2. Schwab US Dividend Equity ETF
While the SPDR Portfolio S&P 500 High Dividend ETF is heavily focused on three sectors not known for rapid growth, the Schwab US Dividend Equity ETF’s approach specifically steers the ETF toward growth. It excludes real estate investment trusts (REITs) from inclusion, so there is little overlap in real estate. It specifically looks for companies that have increased their dividends annually for at least ten years, tilting the portfolio in the direction of growth.
After that, however, things get a little more 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 are included in the ETF.
In short, the Schwab US Dividend Equity ETF attempts to strike a balance between yield, quality and dividend growth. The only material sector overlap with the SPDR ETF is in the financial sector, where this Schwab ETF invests approximately 17% of its assets. The other high exposure sectors are healthcare (15% of assets), consumer staples (13%), industrials (13%), energy (12%) and consumer discretionary (10%).
It is an attractive addition to the higher-yielding SPDR ETF. But don’t think that the Schwab ETF is a low-yield ETF. The current dividend yield is a very attractive 3.4%. The expense ratio is also very low at 0.06%.
3. Vanguard International High Dividend Yield Index Fund ETF
The first two dividend ETFs 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 into play. This ETF starts with foreign large- and mid-cap stocks that pay dividends, takes out REITs, and then ranks the stocks based on dividend yield. The top 50% of high-yield shares from the selected list end up in the ETF. While the mechanisms are a little more complicated than that, the logic is important here.
The dividend yield is 4.7%. The expense ratio is slightly higher than the other two, but still reasonable at 0.22%. It is higher largely because it invests in foreign stocks. That higher ratio is acceptable because the real goal here is to add diversification beyond U.S. borders. This ETF does this well because it does not invest in American 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 put all three of these dividend ETFs together in one portfolio (using the aforementioned $10,000), you’ll own a fairly attractive, globally diversified mix of dividend stocks. However, the amount put into each fund will depend on your own personal objectives, as those looking for a higher return portfolio will likely prefer the SPDR Portfolio S&P 500 High Dividend ETF and the Vanguard International High Dividend Yield Index Fund ETF Shares.
However, the growth and quality features incorporated into the Schwab US Dividend Equity ETF’s portfolio construction will still be important, as they will help add diversification and offset the ravages of inflation. That is of course also why dividend growth-oriented investors may make this the heaviest weighting in their mix.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
3 Dividend ETFs to Buy with $10,000 and Hold Forever was originally published by The Motley Fool
