Investing in dividend-paying stocks can be a powerful wealth-building strategy. Over the past 50 years, the average contributor S&P 500 The funds outperformed non-dividend payers by more than two to one (9.2% annual total return to 4.3%), according to data from Ned Davis Research and Hartford Funds.
However, digging a little deeper into the dividend stock data shows that dividend growers have delivered the best returns (10.2% annualized) while cutters and eliminators have produced poor returns (-0.9% annualized). With this information in mind, investors should buy ETFs that focus on dividend growth Avoid those full ones Companies are at high risk of dividend cuts.
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Here’s one stock ETF investors should avoid and one they should hold.
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of the Global X Super Dividend US ETF(NYSEMKT: DIV) Investing in the 50 highest-yielding U.S. equity stocks On the one hand, this equity ETF offers fairly broad exposure. High yielding dividend stocksThis makes it an attractive investment for those looking for passive income. It has companies in all sectors of the stock market, led by energy at 20%. Over the past 12 months, the fund has delivered a dividend yield of nearly 7% to investors. It is several times higher than S&P 500Dividend yield (about 1.2%). It also pays monthly dividends, which adds to its appeal.
However, ultra-high-yielding dividend stocks are at a much higher risk of dividend cuts than low-yielding companies. For example, a chemical manufacturer LyondellBasell had The highest dividend yield in the S&P 500 until it cut its payout by 50% earlier this year. Meanwhile, many of the fund’s holdings pay variable dividends due to the volatility of their earnings, including Call-Man MealsA leading producer of eggs. Shares of Cal-Man Foods have fallen over the past three quarters. Meanwhile, there have been a few quarters over the past few years when the company hasn’t paid a dividend.
The fund’s focus on yield has not paid off for investors over the years. The Global X Super Dividend US ETF has delivered only low-to-mid single-digit annualized returns over the past one-, three-, five-, and 10-year periods, most notably since inception in 2013 (3.9%). The value of the fund’s holdings has steadily declined, setting up a significant portion of the income earned. These disappointing returns are why income investors should avoid this dividend ETF.
of the Schwab US Equity Dividend ETF(NYSEMKT: SCHD ) The objective is to invest in 100 high-quality, high-yielding dividend stocks. It follows an index (Dow Jones 100 US Stock Index) that screens companies based on several dividend quality characteristics, including dividend yield, five-year dividend growth rate, and financial strength.
As a result, it has a high yielding dividend growth stock. Its average holding has a current dividend yield of more than 3% and has grown its payout at an annual rate of more than 8% over the past five years (faster than the S&P 500’s 5% dividend growth rate). keep the fund high, Lockheed MartinIt has increased its dividends for 23 consecutive years.
of the Schwab US Equity Dividend ETFFocusing on dividend growers has paid off for investors over the years. It has delivered more than 11% annualized returns over the last one, three, five, and 10 years, as well as since inception in 2011 (13.3% annualized). The fund’s compelling yield (3.3% annualized over the last 12 months) and strong potential for full returns make it The best ETF to buy.
It can be tempting to buy a stock or ETF based on its yield alone. However, this strategy has not historically paid off, as high-yield stocks are more prone to lower payouts and poorer investment returns. That’s why investors should avoid the Global X Super Dividend ETF, which focuses on yield above all else, and load up on the more dividend growth-focused Schwab U.S. Equity ETF.
Before you buy stock in the Schwab US Dividend Equity ETF, consider this:
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Matt DiLallo holds positions in Schwab US Dividend Equity ETF. The Motley Fool has and offers positions at Cal-Man Foods. The Motley Fool recommends Lockheed Martin. Motley Fool has a disclosure policy.
1 Equity ETF to Hold and 1 to Avoid was originally published by The Motley Fool
