There are very few investments in the world that are perfect unto themselves. Most can benefit from being paired with others. That’s particularly true in the exchange-traded fund (ETF) universe, where many of these pooled investment products are designed to offer niche exposures.
That’s even true with dividend ETFs like the SPDR Portfolio S&P 500 High Dividend ETF (NYSEMKT: SPYD), the Schwab U.S. 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 put $10,000 of available funds not needed for monthly bills, bolstering an emergency fund, or paying down short-term debt toward buying shares in all three. Doing so 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 is built from stocks found in the S&P 500 index, a broad-based list of hand-selected large and economically important companies. The 80 highest-yielding stocks in the S&P get put into this SPDR ETF and are equally weighted in the portfolio. That’s basically 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 containing high-yield stocks: Real estate, utilities, and finance. Together, these three sectors make up nearly two-thirds of the fund’s portfolio. That concentration 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 hard to find a higher-yielding dividend stock ETF, given the methodology used. The SPDR Portfolio S&P 500 High Dividend ETF’s dividend yield is an attractive 4.4%. The management fee is a very low 0.07%.
2. Schwab U.S. 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 U.S. Dividend Equity ETF’s approach specifically biases the ETF toward growth. It excludes real estate investment trusts (REITs) from inclusion, so there’s little overlap on the real estate front. It specifically looks for companies that have increased their dividends annually for at least a decade, which tilts the portfolio in the growth direction.
After that, however, things get a bit more complicated. This Schwab ETF creates a composite score based on metrics like cash flow to total debt, return on equity, dividend yield, and the five-year dividend growth rate. Companies are ranked from best to worst on their composite score, and the top 100 on the ranked list get into the ETF.
In short, the Schwab U.S. Dividend Equity ETF tries to find a balance between yield, quality, and dividend growth. The only material sector overlap with the SPDR ETF is in financials, where this Schwab ETF invests about 17% of its assets. The other sectors with large exposure are healthcare (15% of assets), consumer staples (13%), industrials (13%), energy (12%), and consumer discretionary (10%).
It is an attractive complement to the higher-yielding SPDR ETF. But don’t think the Schwab ETF is a low-yielding 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 featured cover the U.S. 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 large-cap and mid-cap foreign stocks that pay dividends, pulls out REITs, and then ranks the stocks by dividend yield. The top 50% of high-yield stocks from the select list get into the ETF. Although the mechanics are a bit more complicated than that, the logic is what’s important here.
The dividend yield is 4.7%. The expense ratio is a bit higher than the other two but still reasonable at 0.22%. It’s 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 that well since it doesn’t invest in U.S. stocks.
It’s also worth noting that this ETF has over 1,500 holdings, so it is diversified in its own right. The largest regional exposure is Europe at nearly 45% of assets, followed by Asia at 26% and emerging markets at 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. The amount that goes into each fund will depend on your own personal goals, however, since those seeking a higher-yielding portfolio will probably favor 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 included in the Schwab U.S. Dividend Equity ETF’s portfolio construction will still be important, as it will help to add diversification and offset the ravages of inflation. Of course, that’s also why dividend growth-oriented investors might make it 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
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