Comparing Dividend ETFs: Schwab U.S. Dividend Equity ETF vs. Pacer Global Cash Cows Dividend ETF

Investing in dividend-paying stocks is a popular strategy for income-seeking investors, and exchange-traded funds (ETFs) that focus on these stocks offer a convenient way to diversify. Among the myriad options available, two notable contenders are the Schwab U.S. Dividend Equity ETF (SCHD) and the Pacer Global Cash Cows Dividend ETF (GCOW). This article will explore their strategies, performance, and costs to help you determine which ETF may be the better choice for generating passive income.

Different Strategies for Selecting High-Yielding Dividend Stocks

Both SCHD and GCOW aim to provide above-average dividend income by holding a portfolio of approximately 100 dividend stocks. However, their selection strategies differ significantly.

Schwab U.S. Dividend Equity ETF (SCHD)

SCHD seeks to track the Dow Jones U.S. Dividend 100 Index, which screens U.S. dividend stocks based on four quality characteristics:

Cash Flow to Debt: This ratio assesses a company’s ability to pay off its debts using its cash flow.
Return on Equity (ROE): A measure of financial performance that shows how effectively a company uses investments to generate earnings growth.
Indicated Dividend Yield: The expected dividend payout relative to the stock price.
Five-Year Dividend Growth Rate: This metric evaluates how consistently a company has increased its dividend payouts over the past five years.

By focusing on companies with strong financial profiles, SCHD aims to deliver sustainable and growing dividends. As of its last annual reconstitution, SCHD’s holdings had an average dividend yield of 3.8% and a five-year dividend growth rate of 8.4%.

Pacer Global Cash Cows Dividend ETF (GCOW)

In contrast, GCOW employs a different approach by screening the FTSE Developed Large-Cap Index for the 300 companies with the highest free cash flow yield over the past year. From this pool, it selects the 100 stocks with the highest dividend yields, weighting them from highest to lowest yield, with a cap of 2% on its top holding. At its last rebalance, GCOW’s holdings had an average free cash flow yield of 6.3% and a dividend yield of 5%.

Comparison of Top Holdings

The differences in strategy lead to distinct holdings in each ETF:

SCHD
GCOW

ConocoPhillips, 4.4%
Philip Morris, 2.6%

Cisco Systems, 4.3%
Engie, 2.6%

Texas Instruments, 4.2%
British American Tobacco, 2.4%

Altria Group, 4.2%
Equinor, 2.2%

Coca-Cola, 4.1%
Gilead Sciences, 2.2%

Chevron, 4.1%
Nestlé, 2.2%

Lockheed Martin, 4.1%
AT&T, 2.2%

Verizon, 4.1%
Novartis, 2.1%

Amgen, 3.8%
Shell, 2.1%

Home Depot, 3.8%
BP, 2%

Geographic Focus

Another key difference is geographic focus. SCHD invests solely in U.S. companies, while GCOW takes a global approach, with less than 25% of its holdings in U.S. stocks. This distinction can impact both risk and return profiles.

Costs and Returns

Cost is a crucial factor when evaluating ETFs, as it can significantly affect long-term returns. SCHD is a passively managed ETF with a low expense ratio of 0.06%, while GCOW is actively managed and has a higher expense ratio of 0.6%. This means that for every $10,000 invested, SCHD incurs only $6 in management fees annually, compared to $60 for GCOW.

Performance Metrics

While both ETFs focus on higher-yielding dividend stocks, their performance varies:

ETF
1-Year
3-Year
5-Year
10-Year
Since Inception

GCOW
11.2%
8.4%
15.5%
N/A
8.8%

SCHD
3.8%
3.7%
12.2%
10.6%
12.2%

GCOW has outperformed SCHD over the past five years, but SCHD has delivered better long-term performance. This is largely attributed to its lower costs and focus on companies that grow their dividends, which tend to yield higher total returns over time.

Conclusion: Which ETF is Better for Passive Income?

Both SCHD and GCOW offer attractive options for investors seeking passive income through dividend stocks. However, SCHD stands out as the better choice due to its focus on dividend sustainability and growth, coupled with a significantly lower expense ratio. This combination positions SCHD to provide investors with a more attractive and growing stream of passive dividend income over the long term.

In summary, while GCOW may offer higher current yields, SCHD’s emphasis on quality and cost-effectiveness makes it a more compelling option for those looking to build a reliable income stream through dividends.

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