Dividend investing offers an intriguing balance of income and growth potential, but wading through the plethora of dividend ETF options can be nothing short of overwhelming.

Adding to the confusion, the names of these ETFs often obfuscate more than they illuminate, promising high-yield or quality dividends without delving into the nitty-gritty of how these outcomes are achieved.

Personally, I don't believe in taking an ETF's name—or its glossy marketing materials—at face value. For me, truly understanding an ETF's potential means diving deep into its methodology.

This entails sifting through the usually exhaustive prospectus and index methodology documents to understand what really makes the ETF tick. What assets is it actually holding? What criteria does it use to select these assets? How does it balance the trade-off between risk and reward?

Today, I'm going to share my insights into what I believe are the best and worst dividend ETFs of 2023. I'll dissect the methodology and underlying assets of each, assessing their true potential for providing a reliable income stream and—equally important— long-term capital appreciation.

Best: Schwab US Dividend Equity ETF (SCHD)

SCHD hasn't performed the best year-to-date thanks to its high financial sector exposure, but that hasn't changed my assessment of it. In my opinion, this ETF ranks the highest among the current U.S. dividend equity cohort thanks to an effective index methodology and robust loadings to various factors.

Its benchmark, the Dow Jones U.S. Dividend 100 Index, is designed to "measure the performance of high-dividend-yielding stocks in the U.S. with a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios."

Specifically, this entails screening for 10 consecutive years of dividend payments, followed by the stocks being ranked in descending order by indicated annual dividend (IAD) yield.

Then, the stocks are then ranked by four fundamental based factors: free cash flow to total debt, return on equity, IAD yield, and five-year dividend growth rate.

The four factors are equal weighted to create a composite score to rank the 100 stocks eligible to be added to the index, rebalanced annually in March.

Practically speaking, these screeners have historically ensured a statistically significant loading to the Fama-French factors of value (HML), investment (CMA), and profitability (RMW), all of which play an important role in ensuring market-beating returns over the long run:

The ETF's decent 30-day SEC yield of 3.57% is also a plus to income-oriented investors, and the low expense ratio of 0.06% is worthy of praise as well.

Worst: Global X SuperDividend ETF (SDIV)

At first glance, the promise of a "SuperDividend" might sound irresistible, especially to those who are new to dividend investing or are primarily focused on income generation. However, this is precisely the sort of yield-chasing that can lead investors down a perilous path.

It's a classic case of what behavioral economists call "the affect heuristic," where people make judgments based on emotional reactions rather than sound analysis. Just because a product has a tantalizing name doesn't mean it's constructed to offer genuine value or risk-adjusted returns.

When an ETF like SDIV boasts a high yield, it's often a magnet for those seeking immediate, substantial income. But it's crucial to remember that a high yield often indicates high risk. This is because dividend yield is calculated as annual dividends per share divided by price per share.

When the price of an asset falls—often due to some inherent risk or problem—the yield can inflate, creating a misleadingly rosy picture. Yield-chasing can therefore expose you to poorly performing assets that can offset any gains you might get from the dividends themselves.

When evaluating any investment—dividend ETFs included—it's essential to focus on total returns, which include both capital appreciation and dividend income. If an ETF's underlying assets are depreciating, even a high yield won't salvage your investment in the long run.

Many investors get caught up in the excitement of immediate income and forget that the primary goal is to grow wealth over time. For a balanced portfolio, you'll want ETFs that offer not just income but also a reasonable expectation for capital gains.

Case in point, while SDIV currently pays a 30-day SEC yield of 10.34% and has made monthly distribution for 12 years running, a backtest shows its ugly sides. From 2012 to present, it has underperformed the S&P 500 and risk-free Treasury bills, even with all dividends reinvested perfectly.