The world of dividend investing is one I think is worth exploring. Even for the most growth-conscious investors out there, receiving some return on capital from time to time is important. Whether that’s in the form of dividends or share buybacks, that’s really an individual preference. But in my view, companies have to start returning capital to shareholders at some point to justify an investment, and there needs to be a solid line of sight to such a return at least over the long-term for my personal consideration of many top stocks.
For investors who want outsized exposure to companies that currently provide dividend distributions, investing in a basket of such stocks via an exchange traded fund (ETF) or similar security is a great way to go. Such funds provide low-cost diversification to particular investing themes, sectors, or overall markets.
In this piece, I’m going to compare and contrast two leading dividend ETFs many investors are right to consider as top options right now.
Schwab U.S. Dividend Equity ETF (SCHD)
One of my top dividend ETF holdings, the Schwab U.S. Dividend Equity ETF (SCHD) is an option I can personally vouch for as one I’ve done the homework on. With an ultra-low expense ratio of just 0.06%, investors gain exposure to a list of some of the top U.S.-based dividend paying stocks.
Accordingly, it should be no surprise to investors that the SCHD ETF has produced annualized returns of around 13.7% over the past decade. Most of the companies held in this fund are among the top beneficiaries of many of the growth trends we’ve seen play out in the economy over the past decade. And the relative stability of holding companies that pay dividends means that investors in this ETF hold some of the highest-quality blue chip names in the U.S. out there.
That’s what’s compelled me to invest in this particular dividend ETF. With top holdings such as AbbVie, Caterpillar and Chevron (companies I’ve touted as top dividend options in the past) included in this ETF, it’s one I think can provide meaningful long-term upside for those willing to be patient.
JPMorgan Nasdaq Equity Premium Income ETF (JEPQ)
An intriguing alternative to the more “traditional” dividend ETF exemplified by SCHD, the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ) is structured a bit differently.
How JEPQ earns the majority of its income is via a covered call strategy on many of the top Nasdaq growth stocks in the market. In other words, investors can generate yield by holding a number of high-quality growth stocks (many of which don’t pay dividends), with this covered call strategy providing income on such names.
And given the nature of covered calls (upside is capped at a certain level), some investors who may be expecting some sort of market pullback may be more intrigued by such an ETf in this current environment. That does appear to be what’s behind this relatively new entrants’ $24 billion surge in assets under management of late.
JEPQ is certainly an intriguing option for investors looking to remain exposed to some of the highest-quality growth stocks, while earning an above-market yield for this exposure. This fund does provide outsized sensitivity to tech sector volatility, but in markets which are relatively flat, this is a dividend ETF that can certainly outperform.
The Verdict
Judge slamming a gavel on her desk
In my view, JEPQ is likely to remain the more exciting choice for investors, given the portfolio of high-quality growth stocks this fund holds.
Now, I’m not sure I like the idea of capping the upside of my growth holdings. I tend to think of a growth bucket and dividend/income bucket differently, and that’s why I gravitate toward SCHD as my dividend ETF of choice.
However, for some investors who want to remain mostly exposed to growth stocks (only), such a fund may be a viable option. And if the market does indeed trade in a sideways fashion for a few years, this ETF could outperform SCHD over such a time frame.
I think the decision between the two really come down to expectations and time horizon. For those thinking long-term, I would consider holding SCHD and a basket of high-quality growth stocks as a preferential option. But to each their own.
Top Gaining Stocks
Top Losing Stocks