2 Strong Dividend Funds With Slightly Different Approaches

Adam McCullough: Strong similarities and a slightly different approach makes both Vanguard High Dividend Yield ETF and Schwab U.S. Dividend Equity ETF strong choices for investors. Let's start with the similarities between these funds.

First, both are great low-cost options. The Vanguard fund only charges 8 basis points per year; the Schwab fund is only 7 basis points a year.

Second, these funds land in Morningstar's large-value category. This isn't that surprising because both funds target stocks that pay higher than average dividend yields. High yielding stocks usually have weak or deteriorating fundamentals, which can make them riskier than lower yielding stocks.

Third, both of these funds have investment processes that effectively manage the risk of targeting high-yielding stocks. But each does this in a slightly different way.

Vanguard High Dividend Yield ETF relies on market-cap weighting and broad diversification to insulate its portfolio from the impact the holding riskier, higher-yielding stocks. It may own stocks that cut their dividend payments, but market-cap-weighting skews its portfolio to larger, more stable dividend payers, and its broadly-diversified portfolio of 400 stocks protect it from a handful of dividend cutters.

Schwab U.S. Dividend Equity ETF employs a few strategies to mitigate the risk of targeting high-yielding names. First, it only looks for stocks that have consistently paid dividends for the past decade. Second, it selects its portfolio of 100 stocks using profitability metrics. This tilts it toward more higher quality names that should be able to maintain their dividend. Third, it market-cap-weights its 100 stock portfolio, so it places more weight on larger dividend-paying firms with durable competitive advantages. Fourth, it caps weightings to avoid outsize stock or sector bets.

Investors looking for dividend strategies should do well by Vanguard High Dividend Yield ETF and Schwab U.S. Dividend Equity ETF. Both strategies levy low fees, have solid investment processes, and carry Morningstar Analyst Ratings of Silver.