Our Top ETF Pick After SPY And QQQ

In Wednesday’s Juice, we made the case for starting your investing activity with the SPDR S&P 500 ETF (SPY) and Invesco QQQ ETF (QQQ). And, quite frankly, if you stopped there, you’d be ahead of most, if not all of your family and friends. However, there’s life beyond SPY and QQQ. 

That said, today’s installment will continue with ETFs and, rather than provide a general strategy, mention the specific ETFs we would invest in after establishing ourselves in SPY and QQQ. This is a strategy for the investor who would like to avoid individual stock-picking because (a) it’s not easy and (b) it requires considerable capital to build sizable positions. 

ETF investing is your one-stop shop for meaningful exposure to the market’s most important and, often, most prolific sectors. As we noted yesterday, with the SPY-QQQ cocktail, you’re super exposed to the tech stocks that have and likely will continue to lead the market. Which means you’re invested in many of the names leading the AI revolution. However, you’re also invested in a wide swath of the drivers of the U.S. economy. 

Here again, it’s difficult to build this type of portfolio via individual stocks. 

To find the next ETF after SPY and QQQ, we think it makes sense to think about investing style. When you do or if you did pick individual stocks, what theme—what type of approach—would you do it around? 

At The Juice, you know we love dividend growth stocks:

While important when evaluating dividend stocks, growth here doesn’t refer to sales or profit growth. Instead, we’re dealing with growth in the dividend. 

Does a company increase its dividend annually?

At the link ahead of that excerpt, we lay out exactly how dividend growth functions, using Apple (AAPL) as an example. You can follow that path via individual stocks or you can buy a dividend ETF. 

We recently explained how 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.

We highlighted several dividend ETFs in that Juice that might be worth your time. However, if we had to pick one, we’d go with SCHD. That’s the #1 most searched ETF (other than SPY and QQQ) in our proprietary sentiment indicator, Trackstar—Schwab US Dividend Equity ETF (SCHD).

Why do we love SCHD?

For starters, it has a super low expense ratio of 0.06%, which actually makes it less expensive than SPY and QQQ with their 0.09% and 0.2% expense ratios. 

But bigger than that, we love SCHD’s dividend yield of 3.5%. It pays its dividend quarterly adding up to a current annual payout of $2.60 per share. So, if you own 100 shares of SCHD, you will receive—all else equal—$260 in dividends each year. However, as the example we referenced and linked to above explains, by reinvesting that dividend you’re actually increasing your position in the ETF and dividend income over time. 

That’s dividend growth investing. 

Savings account and treasury bill rates likely won’t be this high forever. And, even if they are, they don’t come with the capital appreciation of SCHD, which has returned roughly 36% over the last five years, not including the impact of the dividend. 

Owning SCHD gives you increased exposure to some of the same stocks in SPY and QQQ. 

For example, Amgen (AMGN) makes up about 1.15% of QQQ and, because it’s the index QQQ tracks, approximately 1.15% of the Nasdaq-100. However, Amgen is SCHD’s top holding at a concentration of 4.46%. 

Amgen isn’t necessarily a stock you’d be chasing as a DIY investor trying to allocate relatively limited capital to individual names. But it’s a stock with a nice dividend yield of 3.27% that has generated an albeit modest, but still nice return of around 13% and 27% over the last one and five years, respectively.

Doing the same exercise with SPY. Home Depot (HD) makes up less than 1% of SPY, which tracks the S&P 500 Index. But it’s the fifth biggest position, by percentage, in SCHD at just over 4.2%. Up more than 50% over the last five years with a 2.6% dividend yield, HD is a solid stock to own for long-term investors and gets you in sectors outside of tech. 

The Bottom Line: It’s easy to throw names against the wall to see if they stick. It’s harder—though not that hard—to think strategy and approach first. 

You want to be heavy on tech, invest in the broad U.S economy within and beyond tech and call yourself a dividend growth investor. For example, Once you know this about yourself—it’s important to know yourself like this as an investor—you can set out on picking individual assets to execute your approach and strategy. Like we did here today and yesterday. 

Stick with The Juice. In the coming weeks and months, we’ll use this model to find investments to fit other approaches and strategies. So tell a friend to subscribe to The Juice and our other wonderful newsletters.

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• Check Out The Juice’s Favorite ETF Screener