High Yield vs. Dividend Growth ETFs

• The ProShares S&P 500 Dividend Aristocrats (NOBL) ETF is a classic dividend growth strategy.

• The Schwab US Dividend Equity ETF (SCHD) combines elements of dividend growth, dividend quality and high yield.

• With the market starting to move away from technology, but the economy still looking decent, the Schwab ETF looks better positioned.

• 10 Stocks We Like More Than the Schwab US Dividend Equity ETF ›

While both categories technically fall under the “dividend” umbrella, investing in dividend growth stocks and high yield stocks can produce very different results.

On the one hand, long-term dividend producers tend to be very stable, mature companies that generate solid cash flow but little growth. High yielders, on the other hand, are typically more cyclical in nature and rely on generating large cash flows to support those higher dividend payments.

With the economy and markets looking set to turn around, it’s a good time to assess the outlook Schwab US Dividend Equity ETF (NYSEMKT: SCHD)a popular choice with high yield and ETF ProShares S&P 500 Dividend Aristocrats (NYSEMKT:NOBL)a standard bearer of long-term dividend growth.

The Schwab US Dividend Equity ETF is compared to Dow Jones US Dividend 100 Index. It starts by identifying a universe of stocks that have paid dividends for at least 10 consecutive years. From there, it considers multiple fundamentals as well as dividend history to search for the best combinations of dividend growth, financial health and yield. The final portfolio is weighted by market capitalization.

This fund has underperformed over the past three years as dividend payers fell out of favor during the technology and artificial intelligence (AI) boom. The stock portfolio is still solid, but likely needs an environment where defensive, cyclical and/or value stocks have a moment again. An allocation of 19% to energy stocks, 18% to consumer staples and just 8% to technology reflects how poorly positioned the fund has been for recent growth. But it does indicate how it could turn around if the current market rotation continues.

The ProShares S&P 500 Dividend Aristocrats ETF tracks S&P 500 Dividend Aristocrats® Index. (The term Dividend Aristocrats® is a registered trademark of Standard & Poor’s Financial Services LLC.) It targets companies in the major index that have increased their dividends annually for at least 25 consecutive years.

Most companies that have raised their dividends for so long are no longer in rapid growth mode. They don’t have to reinvest a large portion of their available capital back into the business. They have probably reached a mature stage where they can consistently reward shareholders. As such, this portfolio tends to be filled with “boring” companies, including top holdings Albemarle, Cardinal Healthand CH Robinson worldwide.

There’s an argument for both ETFs, given their composition. The ProShares ETF could do particularly well if there is a broader de-risking shift in the markets due to its value orientation and tilt toward more defensive areas of the market.

My preference is still the Schwab US Dividend Equity ETF. Its 3.7% yield, combined with a strategy focused on dividend quality and sustainability, makes it an ideal choice for any dividend seeker, whether they’re looking for growth or yield. The fund’s outstanding track record in its first decade of life demonstrates how well it can perform when conditions turn in its favour.

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David Dierking has no position in any of the listed stocks. The Motley Fool has positions in and recommends the ProShares S&P 500 Dividend Aristocrats ETF. The Motley Fool recommends CH Robinson Worldwide. The Motley Fool has a disclosure policy.

SCHD vs. NOBL: High Yield vs. The Dividend Growth ETF Showdown was originally published by The Motley Fool