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Proprietary Data Insights Top ETF Searches This Month
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Using ETFs To Buy Dividend-Paying Stocks |
Last week, our sister newsletter, The Spill, gave the Schwab US Dividend Equity ETF (SCHD) a 10/10 rating. It was timely because we had already started outlining today’s installment. Plus, we included SCHD in the ETF portfolio we built earlier this year. The Spill calls SCHD the best of the dividend-paying ETFs and we agree. Part of their rationale – the fund’s low cost structure. SCHD carries a 0.6% expense ratio. A 64% five-year return and roughly 3.5% dividend yield also doesn’t hurt. So, to get everyone up to speed, what is a dividend ETF, how do they work and why would you invest in one? [instorylist_ad] What is a dividend ETF? Yes, dividend ETFs own dividend-paying stocks. But, like the rest of the ETF universe, there’s a ton of variation and specialization. In this Juice from May – 3 Popular Dividend ETFs: Pick One Or Pick Them All? – we distinguish between three different dividend ETFs, including SCHD. Like most ETFs in general, dividend ETFs often passively track a stock market index. However, there can be considerable variation between these indices. While SCHD attempts to mirror the performance of an index of the Dow’s biggest dividend-paying stocks, dividend ETFs use a wide variety of indices as benchmarks. To give you an idea, here’s a small sample of ETFs and the indices they use:
We could literally go on all week. There are an endless number of indices tracking every area of global stock markets imaginable and a commensurate number of ETFs tracking them. Not all dividend ETFs track an index. Some take active or thematic approaches. Such as the Amplify YieldShares CWP Dividend & Option Income ETF (DIVO): DIVO uses an active management approach. That is the fund manager selects stock they think will perform well based on their knowledge, market conditions and developments in individual stocks. The manager does this around a theme. DIVO’s theme is to buy high-quality, dividend-paying stocks and write covered calls on these holdings. You can find an active ETF for any taste or preference. For example, we talk a fair bit about Canada. For that, there’s the BMO Canadian Dividend ETF (ZDV), which: The Fund utilizes a rules based methodology that considers the three year dividend growth rate, yield, and payout ratio to invest in Canadian equities. So, you get the point. Search for the type of dividend stocks you want to invest in – on the basis of everything from size to place to technical metric – and you’re likely to have several options to choose from. How do dividend ETFs work? The fund owns the companies’ stocks. The companies pay dividends directly to the fund. The fund then pays regular dividend distributions to its shareholders. How do those payouts look? It depends on the ETF. Using SCHD as a typical example. The ETF pays quarterly distributions in March, June, September, and December. Then there is ZDV and others that make their distributions monthly. As with individual stocks, you can reinvest your dividends (in this case, into new shares of the ETF) or take them as cash. You also have to consider the tax implications, a long and relatively complicated subject we plan to cover in the near future. Why invest in a dividend ETF?
To keep things simple. Most of us don’t have the financial firepower – or time – to buy a large enough number of individual stocks to get even close to diversification. However, the right blend of ETFs – dividend ETFs or otherwise – can help get you closer. It’s simple math – $10,000 buys you around 52 shares of Apple (APPL). That same $10,000 can get you exposure to a basket, or two, or three, of dividend stocks spanning a broad or specific universe. Or, let’s say you own a bunch of individual dividend stocks and want more exposure. You can use ETFs to increase your exposure, albeit indirectly. ETFs provide a set it and forget it strategy that can take much of the guesswork out of dividend stock investing. The Bottom Line: We love ETFs. And we love dividend stocks. However, both areas can be confusing, if not intimidating given their sheer – and increasing – size and scope. If you’d like to sleep better at night knowing that you have effectively spread your money around, ETFs might be the answer. We live to help level the playing field and make you better with money by detailing the ins and outs of these areas using plain language and clear examples. Don’t look now, but we’re already headed to the holidays. The Juice has plans for several series on both of these subjects – general ETF and specific dividend investing – in 2023 and into 2024. So tell a friend about our little newsletter. Let them know that, like you, they can subscribe for free.
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