2023-06-03 08:00:00 ET
Summary
- Dividend stock portfolios provide a balance between benefiting from long-term economic growth and offering an attractive passive income stream for retirees.
- SCHD and SPHD are among the best funds for retiring with dividends.
- We compare them side by side and offer our take on which one is the most attractive at the moment.
Retiring with dividends is a great approach to funding one's post-career years. Popular alternative routes such as investing in bonds ( BND ) and annuities allow inflation to eat up your income stream. Meanwhile, investors who go the route of investing in broad market index funds like the S&P 500 ( SPY ) or Nasdaq ( QQQ ) suffer from extremely low income yields, and therefore must cannibalize their positions over time by gradually selling shares. While this is not problematic during a protracted bull market such as we saw in the 2010s or 1990s, retirement plans can be dashed during lost decades such as we saw in the 2000s. This is especially true during dramatic market crashes such as we saw at the end of the tech bubble of the 1990s, the end of the real estate bubble in 2008, and - most recently - the epic tech ( ARKK ) bubble collapse of 2021 and 2022:
In contrast, a dividend stock portfolio provides the best of both worlds:
- As an equity portfolio, it benefits from long-term economic growth and therefore tends to grow its earnings and dividends at the same rate of - if not faster than - inflation over the long-term.
- At the same time, since it also throws off an attractive passive income stream, investors do not need to worry about market movements as much. Instead, they can simply keep calm and let the dividends flow.
Two popular vehicles for living the dividend dream in retirement are the Invesco S&P 500 High Dividend Low Volatility ETF ( SPHD ) and the Schwab U.S. Dividend Equity ETF ( SCHD ).
In this article, we will compare these funds side by side and share our view on which is the better buy for retiring with dividends.
SPHD Vs. SCHD: Dividend Yield & Growth
When it comes to the trailing twelve-month dividend yield, SPHD comes out ahead with a TTM dividend yield of 4.38% compared to SCHD's TTM dividend yield of 3.78%.
When it comes to dividend growth, however, SCHD comes out clearly ahead:
When taking full-year payouts into account, SCHD has an 11.72% 10-year dividend per share CAGR whereas SPHD has a 10-year dividend per share CAGR of 10.33%, making the comparison appear much closer than the chart above indicates. Over the trailing twelve months, SCHD's dividend grew by 16.63% year-over-year whereas SPHD's dividend per share grew by just 8.03%.
Therefore, when thinking about these two funds, it is fair to assume that both of their dividends will likely outgrow inflation over time, but SCHD's will very likely grow faster than SPHD's. That said, SPHD's starting yield is 60 basis points higher than SCHD's - and actually exceeds the 4% often targeted for retirement spending - so investors who want a higher current yield should keep that in mind as well.
SPHD Vs. SCHD: Total Returns
It is interesting to note that for many years, SPHD and SCHD traded places when it came to comparing total return performance. However, since 2019 it appears that SCHD has taken the clear lead and this lead expanded further in the wake of the COVID-19 outbreak:
Over the past three years, this pattern has continued, though there is clearly very tight correlation between these two funds:
As a result, we can conclude that SCHD has a superior total return track record to SPHD when it comes to generating long-term wealth. T
SPHD Vs. SCHD: Expense Ratio
SCHD's outperformance of SPHD is not entirely surprising given that SPHD has a materially higher expense ratio than SCHD does (0.30% vs 0.06%). As a result, over the long-term - all else being equal - SCHD should outperform SPHD by ~24 basis points per year. Over a long period of time, this difference can compound to quite a sum.
SPHD Vs. SCHD: Diversification & Recession Resistance
Finally, although SCHD looks like the superior fund of the two when looking at historical data, it is important to keep in mind that the next decade will quite possibly look different from the one that preceded it. As a result, we will take a deeper look at these funds' constitution in order to better judge how suited they are to an economic environment where inflation and interest rates are elevated and economic growth is slowing.
SCHD enjoys a good level of diversification, with allocations ranging between 8.88% and 17.33% for most sectors. Notable exceptions are the communications sector at 4.64%, basic materials at 1.92%, utilities at 0.29%, and real estate at 0%. Currently, its most overweight sectors are industrials at 17.33% and health care at 15.71%. Additionally, it is worth mentioning that a dividend-focused ETF also holds 13.79% exposure to the technology sector. As a result, investors in SCHD can enjoy an attractive current dividend yield along with strong growth, knowing that they are also enjoying meaningful exposure to the technology sector.
It is also worth noting that SCHD is well-diversified by individual holding, with 104 individual holding, though its top few holdings occupy a disproportionately large amount of its portfolio (its top 10 holdings make up 42.31% of its portfolio).
SPHD, meanwhile, is not nearly as well diversified as SCHD is by position, with only 51 holdings. That said, it has a very different portfolio structure, with heavily overweight positions in the two sectors where SCHD has little to no exposure: real estate (18.68%) and utilities (17.27%). It also has considerable exposure to the consumer defensive (11.26%), consumer cyclical (9.76%), communication (9.38%), healthcare (8.57%), and financials (8.44%) sectors. It has only 5.37% exposure to technology, 5.13% exposure to energy, 3.74% exposure to industrials, and 2.39% exposure to basic materials.
Moreover, even though it has less than half as many positions as SCHD, its top 10 holdings only make up 26.37% of its total portfolio, indicating that it is less overweight a few select positions.
Investor Takeaway: Which Is The Better Buy?
Both funds appear to be adequate and even potentially very good funds for retiring on dividends. The big advantage of SPHD is that it offers investors a superior current dividend yield and also has much greater exposure to recession-resistant stocks in the real estate, utilities, and consumer defensive sectors.
In contrast, SCHD has a lower current yield and is more aggressively oriented in its portfolio weighting, which helps to explain its outperformance of SPHD during the economic expansion and bull markets of the past decade plus.
We think that SPHD's biggest risk moving forward is its heavy exposure to commercial real estate in a period where the sector is facing headwinds from rising interest rates. At the same time, however, much of this headwind has already been priced in, so it has that working for it.
Overall, we favor SCHD over SPHD due to its meaningfully lower expense ratio and its clearly superior track record. We also like the technology exposure that it offers. Moreover, if investors want to better round out their portfolios with utilities and real estate exposure, they can always either buy low-cost ETFs like XLU (0.10% expense ratio) and VNQ (0.12% expense ratio) to supplement their SCHD position, or they can simply buy some high yielding, undervalued blue chips in those sectors.
For further details see:
Retire With Dividends: SCHD Vs. SPHD