Income investors often focus on a stock's dividend yield, but dividend yield alone doesn't vide anywhere near enough information when it comes to selecting exchange-traded funds (ETFs).
For example, the is Select Dividend ETF (DVY 0. 45%) is a fund with over $20 billion in net assets, thanks largely to its 3.
But at the end of the day, this is ETF may not be the best choice for most income investors, and the reasons become when comparing it to another dividend-focused ETF. What does the is ETF do.
The is Select Dividend ETF tracks the Dow Jones U. Select Dividend Index, which uses certain screening criteria to buy 100 financially strong dividend payers and then weights them by dividend yield.
This means the highest-yielding stocks make up the biggest positions for the fund and have the biggest impact on its performance. Image source: Getty Images.
The index's screening cess has these requirements for its holdings: They paid dividends in each of the past five years.
Dividends increased over the five-year span, though not necessarily in every year. They had positive earnings over the past year.
The ratio of net income to dividends paid, or dividend coverage, is 167% or better.
From the resulting list, which excludes real estate investment trusts (REITs), the 100 highest-yielding stocks are included in the Dow Jones U. Select Dividend Index and, thus, the is ETF.
The is Select Dividend ETF has a dividend yield of around 3. 7% as of this writing, which compares favorably to the S&P 500 index's roughly 1.
However, the fund's expense ratio is rather high for an ETF at 0. A better choice to consider The Schwab U. Dividend Equity ETF (SCHD 0.
20%) also holds 100 stocks, though in this case, the fund's portfolio is market-cap weighted. That means the largest companies have the greatest impact on the fund's performance.
The Schwab ETF's screening criteria are also different as it tracks the Dow Jones U. Dividend 100 index instead.
This index only includes companies that have increased their dividends every year for at least a decade (again, REITs are excluded).
A composite score is calculated for each of these companies by looking at their ratio of cash flow to total debt, return on equity, dividend yield, and five-year dividend growth rate.
The 100 companies with the highest composite scores make into the index. The Schwab ETF boasts a higher yield of 4. Its expense ratio is also lower at 0. Data by YCharts.
The of is in the returns and yield With that information, picking the better overall dividend ETF for your portfolio should be fairly easy if you're looking to maximize income: The Schwab U.
Dividend Equity ETF has a higher yield. But don't stop there because a higher yield isn't the only thing you're getting with the Schwab ETF -- it's also much less expensive to own.
An investor with $10,000 invested in each option would owe $38 in fees to the is fund versus just $6 to the Schwab fund.
With fees paid annually on the total value of your position in each ETF, the higher expense ratio can add up to hundreds or thousands of dollars over time.
The real icing on the cake, however, is evident by comparing the returns these two ETFs have vided to investors. The Schwab ETF's price performance has beaten that of the is ETF over the past decade.
And as the chart above highlights, so has its total return, which includes the reinvestment of dividends.
Taking these key performance metrics into account, it appears the screening cess backing the is Select Dividend ETF falls short.
If you're a dividend investor who wants an ETF that screens for quality stocks, the Schwab U. Dividend Equity ETF is worth a look. Reuben Gregg Brewer has no position in any of the stocks mentioned.
The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.