ETF Battles: Dividend Safety? Watch SCHD vs. DIVB vs. SPDG!
In the future, lower equity returns could be in the cards. That means the role of dividends will no doubt become an important component, maybe even a forgotten component that will be rediscovered in future returns. In the ETF market, funds focused on dividend income are still one of the largest categories by both assets and just sheer choice.
Today's audience requested triple headers between dividend ETFs from BlackRock, Charles Schwab, and State Street Global Advisors. It's a heavyweight dividend ETF bout. Stick around for a cordial welcome to all you're watching ETF battles, and here we are in season six. I'm Ronda Legi, the chief culprit of this madness, and if you'd like to send us an ETF battle request, I encourage you to do that.
Do so in the comment section below. Send us your ETF ticker symbols. We could do double, triple, and quadruple headers. You can also hit us up on our X feed at ETF guide. Also, be sure to check out our season six playlist to make sure that the ETF battle requests that you're making are for contests that we have not yet already done. Also, visit the description section below. I've got links to our program judges along with our program sponsor, Direction, so don't be a stranger.
We've also got viewer resources with download links to free audio and ebooks and other goodies, so again, hit that description section below. Today's heavyweight triple header dividend ETF bout was requested by a viewer named Sandip, and he submitted this to us on our X feed. It's between dividend ETFs from BlackRock, Charles Schwab, and State Street: DVY, SCHD, and SPDG. Boy, this looks like a good one. Thank you so much, Sandip, for this ETF request, helping us to sort through the clutter.
A duo extraordinaire has joined us. We've got Tony Dong with ETF Central joining us, as well as Mike Akins at ETF Action. Judges, great to see you again. Good to be back, Ron. Thanks for having me.
Our four battle categories are cost, exposure strategy, performance and yield combined, and then we've got our mystery category where you, judges, can shock us with that factor or thing that you feel is crucial to today's contest. Our judges can also nominate Wild Card ETFs if they like something else somewhere else better. They can also opt for split decisions. It is entirely up to them. I've got the scorekeeping duties, and at the end of the program, we will declare an overall winner. Always keep in mind that none of the battle outcomes on this program are ever predetermined or known in advance by myself or our judges.
Let's kick things off with the first category: cost. Tony, please get us started. So, all three of these are low-cost index tracking products. They belong to, for iShares, the core lineup, and for State Street, the portfolio lineup, whereas SCHD, well, most TRW ETFs are cheap. So, DVY and SPDG both charge five basis points, and SCHD charges six. In terms of spread, SPDG has the lowest one, with DVY in the middle, and SCHD on the higher end. It's not as traded frequently, even though the underlying is fairly liquid.
When you put the two together, it's pretty much DVY that ekes out the others, but I want to stress that it's by a very, very slim margin, and all three of these are so cheap that unless you have, like, seven figures in them, I really wouldn't worry about expenses here. Mike, you're up next. How do you see it when it comes to cost?
Yeah, I'd even say eight figures. It's that close. I mean, we're talking nothing. Five basis points and six basis points expense ratios is what makes me love the ETF marketplace, right? You're getting diversified exposure to a lot of great companies in a tax efficient way for almost nothing. It's fabulous. It's why the ETFs are taking over the world, and I love to see it, so I don't really have much to add. Tony did a great job explaining it. Just keep in mind with SPDG, newer, a little bit less AUM, therefore a little less volume.
Spreads are pretty tight, doesn't surprise me coming from a great provider like State Street, but you need to be a little bit careful trading that strategy because you could run into some liquidity issues, get a bad execution, and then, of course, your expense ratio, your total cost goes up quite a bit. That's all I got. A winner? Can't do it between DVY and SCHD. I'll just call it a toss up.
That takes us next to exposure strategy. Mike, you're still up, so break it down for us. Wow. So, just exposure wise, these three products are incredibly close. They look a lot alike when you break it down by market capitalization, when you break it down by size and style, even sectors, pretty close across the board. Strategy wise, you really have three kind of unique ways to go about it.
SPDG is going in there, and it's looking for yield on a sector by sector basis, and it's going to select companies that have a higher yield than the kind of mean yield of each sector, and then it's going to wait in a neutral component to the S&P 500. So, what's great about that is a lot of times dividend strategies, you can get really overweight defensive, and as we know, the market itself is really overweight growth, whether it's tech or consumer discretionary. So, that's going to give you a more market-like return with a little bit more yield. DVY is again, it's a very core product. They call it dividend core for a reason because it's market cap weighted, so they're going in there and looking for the yield products, but then market cap waiting it, which gets it to look a little bit more like the market.
Schwab is the one that's going to use the most fundamental here, and historically that's done really well for it up until this last year. We kind of had a roll over in some of those quality factors, and I'll get into that in performance, but Schwab's taking in a number of factors, thinking about quality of the balance sheet and then going after yield after that from a pure dividend play here, and thinking about why you use dividends, and I think of dividends being used to provide mature companies that can provide a consistent dividend have strong, traditionally have strong balance sheets, and then that extra yield is going to reward an investor over time, kind of that value tilt.
I give it to SCHD even though it's had a tough run here over the last year, but I like all three strategies, but my winner is SCHD because it's more of a fundamental choice approach to it, whereas SPDG and DVY are going to be a little bit more market cap centric. Solid analysis. Thank you, Mike. Tony, you're up next. How do you see it between these two ETFs?
It's really going to depend on your views for sectors. So, if you're the kind of person that is going to panic or worry when your dividend ETF diverges markedly from the market due to, like, as Mike mentioned, severe sector imbalances, SPDG is probably the best one. The sector neutral strategy means that this one is going to have approximately the same sector allocations as S&P 500. So, those overweights to financials, tech, communications, and of course, it's not just a pure yield play. You have a screen that ensures is at least seven consecutive years of dividend payments or increases.
DVY is a little more complex, and I say that because its index has changed quite frequently. The last time was in December 2022, and what they did was that Morningstar placed a higher weight on dividend, so 75%, and just 25% on buyback, so it used to be more balanced as a composite measure of shareholder yield, but they've deemphasized buybacks, and in addition, they increased the UN for the highest yielding stocks to 50% instead of just from the top 90%. So, what that did was that restricted a lot less to just, you know, the highest yielding ones.
Another thing that they implemented that I do like is that they began excluding stocks with dividend yields in the top 5% of the market, and that's something that you see a lot of the top dividend ETFs do, and this just kind of gets rid of your yield traps very efficiently and simply. SCHD, on the other hand, is one of these, like, very complex index ETF that I like because they give you exposure to a very rigorous and systematically implemented strategy at a low cost. So, you know, there's the 10 years of consecutive dividend payment screen, and then it gets weighted on four fundamental factors: free cash flow to total debt, return on equity, indicated dividend yield, and five-year dividend growth rate, and then that gets pared down to 100 stocks.
It reconstitutes every year. If I had to take a high level overview of all three of them, I'm still going to go with SCHD just because I believe the index methodology is very solid. It's been executed consistently, and unlike DVY, you know, there hasn't been, like, changes after the fact by the index provider. Then you can also go on their site and look at the methodology and the back test, and I think it's very sound, even though it had that hiccup. One thing to note is that SCHD just reconstituted this year, and then we're seeing a lot higher waiting towards energy, and I think that's appropriate just given the high free cash flow yield of that sector, the high dividend yields, and also the lower valuations. So, SCHD all the way from me.
Very good, and just explain to our audience real quick, when you said reconstituted, some of our audience members may not be familiar with that. What does that mean? So, reconstitution event is when the index basically goes through its criteria every year or every quarter to add and drop companies. So, rebalancing is when they don't add or drop anything, and they just, you know, reorganize what's in there according to the waiting methodology, but reconstitutions when you'll see new companies enter SCHD and old companies leave.
If you're interested in seeing what the ETF has added and what it's kicked out, you can find that usually on their web page. There's a re annual reconstitution report, and there's a variety of other analysts that will go in detail about what's ch...
