The Two Approaches To Dividend ETF Strategies

When building a diversified investment portfolio, investors may turn to various dividend-paying stock exchange traded funds to generate some extra income.

In an environment of near-zero interest rates and quantitative easing, dividend stocks have attracted investors seeking a better source of income, Ben Johnson, director of global ETF research at Morningstar, said.

When searching for a dividend stock, investors may turn down two different avenues: dividend growers or high-yielding stocks.

“So the growers are those strategies that look to build a portfolio of individual stocks that have grown their dividends with time,” Johnson said. “They show consistent, very reliable, and ideally growing dividend payouts. Now the yielders are a whole nother cohort. The yielders and the underlying benchmarks of the ETFs that look to isolate the yielders screen first and foremost on the basis of yield…. They’re just looking for that headline yield they are not necessarily screening for sustainability and growth of that income stream.”

For instance, investors seeking stable dividend growers may turn to something like the Schwab US Dividend Equity ETF (NYSEArca: SCHD), which includes 100 stocks based on strong fundamentals, dividend yields and consistent dividend payouts for at least 10 consecutive years. SCHD has a 2.94% 12-month yield, comes with a cheap 0.07% expense ratio and can be traded commission-free on the Schwab platform.