In today’s market environment, being a dividend investor can be a bit disheartening, especially with the S&P 500 index sporting a meager 1.2% yield. However, there are simple ways to boost the income generated by your portfolio. Two standout options right now are the Schwab U.S. Dividend Equity ETF (SCHD) and the SPDR Portfolio S&P 500 High Dividend ETF (SPYD). Let’s delve into why these ETFs are worth considering.
Why is the S&P 500’s yield so low?
The S&P 500 index’s low dividend yield can be attributed to its design, which aims to track a broad range of U.S. stocks that are representative of the overall market. This means that the index includes stocks with low or no dividends, resulting in a low overall yield. To address this issue, investors seeking higher yields should consider ETFs that track income-focused indexes.
Additionally, the current market environment is being driven by a small number of large companies, leading to unusual dynamics in other areas. As a result, the S&P 500 index, which is market cap weighted, is likely to have a low dividend yield. While the index itself is not flawed, investors looking for income should explore more targeted options.
What does the Schwab U.S. Dividend Equity ETF do?
The Schwab U.S. Dividend Equity ETF offers a yield of approximately 3.6%, significantly higher than the S&P 500 index. This ETF focuses on high-quality companies with strong dividend histories, excluding real estate investment trusts. It screens for stocks that have increased dividends for at least 10 consecutive years, ensuring a level of consistency and reliability in dividend payments.
The ETF evaluates companies based on criteria such as financial strength, return on equity, dividend yield, and dividend growth rate. The top 100 highest-scoring companies make it into the ETF, providing investors with an attractive yield backed by quality companies. With a low expense ratio of 0.06%, the Schwab U.S. Dividend Equity ETF is a compelling option for income-oriented investors.
What does the SPDR Portfolio S&P 500 High Dividend ETF do?
On the other end of the spectrum is the SPDR Portfolio S&P 500 High Dividend ETF, which focuses solely on yield. This ETF selects the 80 highest-yielding stocks from the S&P 500 index and equal weights them, resulting in a high yield of 4.3%. While the ETF offers an attractive income stream with a modest expense ratio of 0.07%, it also introduces concentration risk by heavily investing in sectors like real estate, financials, and utilities.
Investors considering the SPDR Portfolio S&P 500 High Dividend ETF should be aware of the potential stock-specific risks and sector concentration. Pairing this high-yield ETF with a more diversified option or a quality-focused ETF like the Schwab U.S. Dividend Equity ETF could provide a balanced approach to income generation.
Passive income is there for the grabbing
For investors seeking passive income, there are a plethora of ETF options available, catering to various investment preferences. While the SPDR Portfolio S&P 500 High Dividend ETF may appeal to those focused solely on yield, the Schwab U.S. Dividend Equity ETF offers a blend of high yield and quality screening. Consider owning both ETFs to optimize your income generation strategy and mitigate risks associated with sector concentration or individual stock performance.
In conclusion, by exploring targeted dividend ETFs like the Schwab U.S. Dividend Equity ETF and the SPDR Portfolio S&P 500 High Dividend ETF, dividend investors can enhance the income potential of their portfolios while maintaining a level of quality and diversification. With the right combination of ETFs, investors can tap into the power of passive income and build a resilient investment portfolio.
