If you're a dividend investor who doesn't necessarily want to spend hours researching individual stocks, dividend ETFs may be perfect for you; in fact, you can actually build a complete dividend portfolio with just a few ETFs, suggests David Dierking, editor of TheStreet's ETF Focus.
I often talk about the three pillars of dividend investing — dividend growth, dividend quality and high yield. Hit all three of these pillars and you've got most corners of the market covered!
If you look around through the dividend ETF universe, I think you can build a well-rounded dividend portfolio with just five funds. So let's keep it simple.
WisdomTree U.S. Total Dividend ETF (DTD)
This is our core dividend stock ETF position. This fund targets U.S. companies that pay regular cash dividends and meet other liquidity and capitalization requirements. The index is dividend weighted to reflect the proportionate share of the aggregate cash dividends each company is projected to pay in the coming year.
In my opinion, DTD is an under-appreciated gem. It's only got $1 billion in assets, but I think it offers something that investors could really use. If you don't want to try to time whether dividend growth is in favor or high yielders are in favor, why not just buy the whole universe and not worry about it? The expense ratio isn't great, but it's reasonable enough to not be a handicap.
Vanguard Dividend Appreciation ETF (VIG)
This is our dividend growth ETF option. VIG tracks a market-cap-weighted index of U.S. companies that have increased their annual dividends for 10 or more consecutive years.
VIG is one of the largest and most popular ETFs in the entire marketplace and its simple strategy makes it ideal for investors who want to add long-term dividend growers to their portfolio without any frills or surprises.
VIG's screen allows for more a little growth pop in the portfolio. You can find names, such as Apple (AAPL) and Microsoft (MSFT), in VIG and I like adding a little zest to an otherwise more defensive portfolio overall. It's a personal preference for me, but both work well.
FlexShares Quality Dividend Index ETF (QDF)
This is our dividend quality ETF option. This fund is designed to provide exposure to a high-quality, income-oriented universe of U.S. stocks with an emphasis on long-term capital growth and a targeted overall beta of 1. Companies included in the index are selected based on expected dividend payment and fundamental factors such as profitability, management expertise, and cash flow.
I've always liked QDF's selection strategy. Its focuses on positive fundamental metrics and high yields, but then optimizes the portfolio to expose shareholders to only market-average levels of risk. That makes it a great add-on to an S&P 500 or total market index ETF. It shouldn't (in theory) add any additional risk exposure, but gives you a higher quality factor in your portfolio.
iShares Core High Dividend ETF (HDV)
This is our high yield ETF option. This fund provides access to 75 dividend-paying domestic stocks that have been screened for financial health by looking at a pair of Morningstar measures, one for "economic moat" and one for "distance to default".
To be fair, HDV doesn't deliver pure high yield exposure. The problem with targeting pure yield is you have the potential to include some bad apples — those with artificially high yields due to share price declines or those at risk of a dividend cut. I don't think HDV's quality screen is necessarily very robust, but it should do enough to weed out the outliers.
Schwab U.S. Dividend Equity ETF (SCHD)
This is our multi-strategy dividend ETF option. This fund measures the performance of high dividend yielding stocks issued by U.S. companies that have a record of consistently paying dividends and are selected for fundamental strength relative to their peers based on financial ratios.
Eligible stocks must have sustained at least 10 consecutive years of dividend payments and are then selected by evaluating the highest dividend yielding stocks based on four fundamentals-based characteristics — cash flow to total debt, return on equity, dividend yield and 5-year dividend growth rate.
This is simply my favorite dividend ETF and the one that does the best job of targeting dividend growth, dividend quality and high yield all in one package! If you were to hold just one dividend ETF in your portfolio, this would be it for me, but it also makes for a perfect complement to a broader dividend portfolio as well.
