Key Points
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The Schwab U.S. Dividend Equity ETF prioritizes tickers with higher yields.
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The Vanguard Dividend Appreciation ETF has inadvertently become a growth fund that also pays ever-rising dividends.
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The iShares Core Dividend Growth ETF is arguably a hybrid of the other two, but it’s different from both in how it allocates the size of its holdings.
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When most investors think about building wealth, high-performance growth stocks come to mind. And understandably so. After all, these tickers — by design — often dish out market-leading gains.
Growth stocks aren’t the only path to riches, though. If you’re patient enough to leave them alone for long enough, the cumulative effect of consistent dividend payments reinvested in more shares of the stock paying them can build serious wealth as well. Again, you just need to be patient to get that ball rolling.
With that as the backdrop, here’s a closer look at three dividend-oriented exchange-traded funds you might want to plug into sooner than later. Notice that each one is at least somewhat different than the other two, meaning there’s a benefit to owning all three since they’ll all perform well at different times.
Schwab U.S. Dividend Equity ETF
If there’s only room for one dividend fund in your portfolio right now, the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is your first best bet… not because of what it owns, but what it doesn’t own.
At first blush, it looks more or less like any other dividend ETF. Dig deeper, though. This fund is meant to mirror the Dow Jones U.S. Dividend 100™ Index.
That may not mean a whole lot to most investors, but this will: Unlike most index funds that select their underlying stocks based on nothing more than sector or size, the Dow Jones U.S. Dividend 100 Index specifically seeks out stocks with fundamentals that are more attractive than its peers and at least five years’ worth of annual dividend growth, prioritizing tickers with higher dividend yields. That’s why this ETF’s trailing dividend yield of 3.3% is measurably higher than most other dividend ETFs. That, and the fact that the underlying index is more equal-weighted than cap-weighted, preventing massive companies from being over-represented. Its biggest holdings right now are Merck, Home Depot, and UnitedHealth, if that tells you anything. Although it’s not the intent, it’s very much a value fund rather than a growth fund.
Yes, that’s a big reason SCHD has mostly underperformed since this bull market began back in late 2022. It’s been led by growth stocks, particularly AI technology stocks.
Nothing lasts forever, though. Value names will outperform again sooner rather than later, as higher interest rates suggest we’re progressing into the latter phases of an economic growth cycle. In fact, we’re already seeing hints of this in this fund’s recent performance.
Vanguard Dividend Appreciation ETF
If the Schwab U.S. Dividend Equity ETF is at one end of the dividend fund spectrum, the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) as at the other. It’s more of a growth fund than a value fund, with a trailing yield of only 1.5% and top holdings like technology giants Broadcom, Apple, and Microsoft. It’s still technically a dividend fund, though. You’ll just see an inordinate amount of its net growth driven by capital gains rather than cash distributions. Whatever works.
Vanguard’s popular dividend ETF (with $128 billion worth of total managed assets) became this somewhat unintended growth/income hybrid via a quirk in the S&P U.S. Dividend Growers Index it’s based on. The main criterion for inclusion in the index is a minimum of 10 consecutive years of dividend increases, regardless of the size of these increases or the underlying yield of the stock paying them. The end result is a lot of exposure to growth names like Broadcom and Microsoft that technically meet these criteria but aren’t exactly viewed as dividend holdings.
That being said, there’s no reason this growth investment can’t also evolve into an important income machine for your portfolio. Although newcomers will only be getting in at a ho-hum yield of 1.5%, this ETF’s quarterly dividend payments have increased by nearly 50% over the past five years. It wouldn’t be wrong to buy it now, with plans to use its cash dividend payments later, when they’re measurably larger. You’ll still be plugged into their growth potential.
iShares Core Dividend Growth ETF
Finally, add the iShares Core Dividend Growth ETF (NYSEMKT: DGRO) to your list of dividend funds that could quietly build some serious long-term wealth… if you’re willing to let it.
The trailing dividend yield of just under 2% is decent, although not thrilling. Meant to mirror the Morningstar US Dividend Growth Index, it holds the usual suspects like Johnson & Johnson and JPMorgan Chase, but also the aforementioned Apple and Microsoft. That’s why its yield is between SCHD’s and VIG’s. From that perspective, this ETF seems like an all-around alternative to holding both of the other two.
DGRO brings something unique to the table, and it makes a great pick in its own right, even when held alongside the Vanguard Dividend Appreciation ETF and the Schwab U.S. Dividend Equity ETF. That is, the iShares Core Dividend Growth ETF is dividend-dollar-weighted, with a 3% cap on any given holding. That just means the proportion of any company’s presence in the index reflects the relative amount of cash that company is expected to distribute as dividends over the coming year. It’s weird, but it works.
More importantly to interested income investors, this somewhat unusual index construction gives you a slightly different performance profile than the other two ETFs in focus here. Although seemingly similar, it wouldn’t be wrong to simultaneously own all three names to help smooth out the rough edges.
More than anything, though, don’t dismiss dividend stocks or ETFs as wealth-building growth engines. They may get a slow start, but if you reinvest their dividends, you’ll usually see a very strong finish. They’re typically easier to stick with than most growth stocks as well.
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JPMorgan Chase is an advertising partner of Motley Fool Money. James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Apple, Broadcom, Home Depot, JPMorgan Chase, Merck, Microsoft, and Vanguard Dividend Appreciation ETF. The Motley Fool recommends Johnson & Johnson and UnitedHealth Group. The Motley Fool has a disclosure policy.
