Skip Individual Dividend Stocks: These 3 ETFs Cut Your Risk in Half

QUALCOMM (NASDAQ:QCOM | QCOM Price Prediction) is the largest position in the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD), making up only about 7% of assets. Most holdings sit below 1%. If one company cuts its dividend, the fund’s income barely moves. In a 15-stock portfolio, the same cut can wipe out a month of grocery money. For anyone at or near retirement, that buffer is the main reason to own a fund instead of picking stocks individually.

The three funds below spread risk differently, but each sets reliable income differently. SCHD screens for quality and yield together. The iShares Core Dividend Growth ETF (NYSEARCA:DGRO) looks for dividends that keep rising. The iShares Core High Dividend ETF (NYSEARCA:HDV) targets the biggest checks today. These choices lead to very different portfolios.

SCHD Offers the Strongest All-Around Income Core

SCHD tracks the Dow Jones U.S. Dividend 100 Index. To get in, a company needs at least 10 consecutive years of dividend payments. The index then ranks the survivors on four measures: cash flow relative to debt, return on equity, dividend yield, and five-year dividend growth. The yield screen alone would pull in companies under stress. The other three measures push those out, because a stressed company rarely has strong cash flow and fast dividend growth at the same time.

The result is a portfolio of about $95 billion that goes beyond the usual utility-heavy income mix. Two other top holdings make up roughly 6% and about 5%, with consumer staples, energy, and telecom names filling out the list.

Over the past 12 months, distributions totaled $1.05 per share. At a price near $33, that works out to a trailing yield of about 3.2%.

Fees matter more to income investors than most realize. A fund’s expenses come straight out of dividends collected before reaching you. A fund charging 0.50% eats a much bigger share of a 3% yield than that number suggests. SCHD’s fee is among the lowest among dividend ETFs, so almost all income reaches shareholders. The fund’s adjusted return over the past year is about 24%.

The drawback: SCHD follows its rules even when that means selling a winner. The index dropped Broadcom in March 2024, and SCHD holders no longer owned it. When a stock’s yield falls because its price has risen, it can get rebalanced out at exactly the wrong time.

For Income That Grows With You, Consider DGRO

DGRO tracks the Morningstar US Dividend Growth Index. Companies need at least 5 consecutive years of dividend increases and a payout ratio below 75%, meaning they pay out less than three-quarters of their earnings. The index also cuts the top 10% highest yielders. That last rule is the key difference from a high-yield screen. A very high yield often means the market expects a cut, and DGRO leaves those names out on purpose.

The fund holds several hundred companies, so no single holding drives the income. The starting yield is lower, at about 2.0% on trailing distributions of $1.49. The expense ratio is 0.08%.

What you get in exchange is growth. Quarterly checks were around $0.17 per share in 2015, and the latest one was $0.38.

Over 10 years, DGRO has returned 243%, the best of the three, compared with 224% for SCHD.

The drawback: A retiree needing cash now gets the smallest paycheck. DGRO has also trailed recently, gaining about 13% over the past year.

Bigger Checks Today Make HDV the Overlooked Pick

HDV is the fund most likely to get skipped on a basic screen, and it has a clear reason to be on this list. It starts with the Morningstar Dividend Yield Focus Index, keeps only companies that Morningstar rates as having a narrow or wide economic moat (a lasting competitive edge), and applies a test of how close each company is to default. From what is left, it picks about 75 of the highest yielders. The moat and default tests are what separate HDV from a plain high-yield fund that would buy whatever pays the most.

The portfolio leans toward energy, healthcare, and consumer staples. HDV usually has the highest current yield of the three funds. Its payout pattern is changing: the last three distributions came in July, August and September, after years of quarterly payments. The 30-day SEC yield on the iShares website is the better number to use, as it shows dividends the portfolio actually earns after expenses. The fee matches DGRO’s at 0.08%.

HDV has also done better than many people assume. Its five-year return of 74% is ahead of both SCHD and DGRO over that period.

The drawback: With only about 75 stocks and a big energy allocation, a bad period for oil hits HDV much harder than the other two. Over 10 years, its 146% return trails both of them.

Why Covered-Call Funds Were Left Off

Options-income funds such as the JPMorgan Equity Premium Income ETF (NYSEARCA:JEPI) advertise larger payouts from selling call options on holdings and passing along premiums. That gives up stock upside, since gains above the strike price go to the option buyer. A headline distribution rate built on option premiums differs from dividend yield and changes with market volatility. Each of these three funds pays ordinary dividends from real companies.

Which Fund Fits Your Retirement Timeline

SCHD offers the best balance of yield, quality, and cost of the three. It pays a solid current yield, screens for quality, and charges one of the lowest fees available. For an investor holding a single dividend fund, it covers the most ground.

DGRO fits a 58-year-old who is still working, or a new retiree planning for 30 years of withdrawals. Accepting a smaller check now gives you a growing income stream that has a better chance of keeping up with inflation.

HDV fits retirees who are already drawing income and want the largest check now, and who are comfortable with heavy exposure to energy and healthcare. Its SEC yield and the way its new payout schedule settles over the next few months will show whether those bigger checks hold up (if turning a lump sum into a monthly paycheck is the real goal, we laid out the mix and the payment calendar in a free guide here: The Paycheck Portfolio Method).

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