What You May Have Missed This Week...

The last time I went through this exercise was August 2023. I dubbed it the "Dividend ETF Draft". The idea was pretty simple. If you were to throw every dividend into an available pool and you forced to choose only one at a time to add to your portfolio, which ones would be chosen first? In reality, this doesn't really matter because you can own every ETF in the world if you want to without being forced to pick. But it's still a fun and quite useful exercise.

For each of these, I'll pick an ETF and give a brief case for and a brief case against it along with a few extra thoughts.

The Vanguard High Dividend Yield ETF (VYM) is one half of the pair of Vanguard dividend powerhouses along with the Vanguard Dividend Appreciation ETF (VIG). Its simplistic approach to stock selection and ultra-low fee allows investors a way to capture an above average dividend yield without overexposing them to unnecessary risks.

Admittedly, I've not been the biggest fan of VYM. In the world of high yield equity strategies, VYM has, in my opinion, one of the loosest qualifying criteria. It's probably no surprise to you then that I don't think VYM deserves to stand alone in a dividend portfolio. Its sole focus on high yield equities alone means it should be paired with other dividend ETFs to broaden out your focus. The less-than-ideal targeting strategy means you could improve there as well.

When it comes to core portfolio construction, few ETFs are better as foundational building blocks than total market funds. They give you virtually total U.S. stock market coverage and often charge just razor-thin expense ratios. They're ideal for long-term wealth creation.

If you're for a total market fund, it makes sense to start with the big three issuers - Vanguard, BlackRock and State Street. After all, these tend to be the ones with the greatest liquidity and lowest fees. All of them focus on the comprehensive U.S. equity market, but because of that, they're all very similar. To decide if one is better than the other, we need to dig into the details to figure out if there's any advantage to one ETF or if they're essentially interchangeable.

For many investors, the core of their portfolio is invested in the S&P 500, which makes for a great core foundation for long-term wealth building.

But it's not a complete market representation. As an index, it represents only the largest companies in the United States. Within the index, it's heavily overweighted to just the magnificent 7 stocks, which account for roughly 1/3 of the S&P 500 overall. In reality, investing in the S&P 500 means putting all of your eggs in the basket of just a handful of stocks.

It needs to be balanced out.

In 2023, dividend stocks steadily underperformed the S&P 500 and Nasdaq 100 as tech stocks roared and the AI revolution began. With some choppiness along the way, the story has been largely the same in 2024. They lagged in January when the market thought the Fed was going to cut rates 6-7 times over the course of the year, but began to lead the S&P 500 again as investors dialed back their most dovish expectations. Since April, dividend payers have been badly lagging the S&P 500 yet again.

Dividend investing has become a bit of a forgotten art. Why should investors worry about dividend yields when investing in the straight market beta is giving you 15-20% a year? Over the long-term, dividends still matter though.

Investing in dividend stocks isn't just about choosing the highest yield or selecting the stocks with the longest dividend growth histories. It's about measuring what the dividend ETF offers versus what your goals & objectives are. Today, I want to look at three specific goals that you should consider when building your dividend portfolio.

If there's one dividend ETF in the marketplace that has captured investors' admiration, it's probably the Schwab U.S. Dividend Equity ETF (SCHD). Unfortunately, it’s stumbled over the past couple of years as tech and the magnificent 7 dominate the market and the fund finally experiences its first real stretch of underperformance. SCHD's all-around approach fits into investors' portfolios as well today as it ever has.

It also makes for a unique investment "problem". How do you build around a dividend ETF that already touches on every major strategy?

The highest rating, five stars, is awarded to a small handful of funds that have historically outperformed their category peers on a risk-adjusted basis. This rating system is a useful tool for investors looking to identify funds that have demonstrated superior performance.

Here’s a look at three five-star ETFs that are on my personal watchlist.