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Schwab U.S. Dividend Equity ETF is a compelling fund for exposure to profitable, large-cap U.S. stocks with attractive dividend yields. Focusing on profitability and yield lowers the risk that the portfolio holds companies that cannot support their dividend payments. A low fee adds to this sensible strategy’s edge over its peers. It earns a Morningstar Analyst Rating of Silver.
This fund starts with the 2,500 largest U.S. stocks, removes REITs, and keeps the higher-yielding half that have consistently paid dividends for the past decade. Next, it scores these remaining stocks across four fundamental metrics: cash flow/debt, return on equity, dividend yield, and five-year dividend growth. The 100 top-scoring stocks make the final cut and are weighted by market cap.
Invesco S&P 500 High Dividend Low Volatility ETF SPHD delivers a high yield while effectively keeping risk in check. This should help it continue to generate attractive performance relative to its peers over the long term. That said, the fund does not take steps to limit unnecessary turnover and often takes large sector bets, which limit its Morningstar Analyst Rating to Bronze.
The fund screens for the 75 stocks with the highest dividend yields in the S&P 500. Chasing yield can lead to a risky portfolio because many of the highest-yielding stocks have poor growth prospects and pay out a large share of their earnings as dividends, leaving a small buffer to cushion dividends if their earnings fall. To limit risk, the fund ranks all stocks that pass its initial screen on their volatility over the past year and removes the most volatile 25. Volatility isn’t a perfect measure of risk, but less volatile stocks tend to have more-stable cash flows than their more volatile counterparts and generally hold up better during market downturns.
Stocks that make the cut are weighted by dividend yield, though the fund caps these weightings at 3% to improve diversification. So, although the fund only includes 50 stocks, it has limited exposure to stock-specific risk. The resulting portfolio lands in large-value territory. It offers a higher dividend yield and smaller market-cap orientation than the Russell 1000 Value Index.
Despite its volatility screen, the fund has exhibited comparable volatility to the S&P 500.