Markets have been rising since April 1, creating renewed concerns about market valuation. Some major metrics, such as Shiller’s price-to-earnings (P/E) ratio, have soared to all-time highs. Normally, when the market reaches such a high valuation, a correction or slowdown occurs.
By now, investors should know that volatility comes with the territory, but it has been even more pronounced over the past two years, as wild swings in the CBOE rate VIX The volatility index attests to this.
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That’s why it’s more important than ever to have a balanced and diversified portfolio. Within the universe of stocks, there are no better diversifiers than dividend or income stocks and exchange-traded funds (ETFs).
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Dividend ETFs not only invest in more stable, highly liquid companies that tend to outperform when the market goes down; They also generate income. High dividend yields can be reinvested in the fund to generate higher total returns. Here are two high-yield, dividend-paying ETFs that are perfect recipes for a volatile market.
1. Schwab US Dividend Stock ETF
He Schwab US Dividend Stock ETF(NYSEMKT:SCHD) has been one of the best performers this year and not just among dividend ETFs. The fund is up about 18% so far this year as investors have flocked to its safety and reliable dividend income amid turbulent markets.
The ETF follows the Dow Jones US 100 Dividend index, which presents High-yield stocks of companies that have sustained at least 10 consecutive years of dividend payments and meet liquidity requirements. But then, that universe is reduced to approximately 100 based on four fundamental screens: cash flow to total debt, return on equity, dividend yield, and a 5-year dividend growth rate. They are weighted using a modified market capitalization approach.
Currently, the three main holdings are Qualcomm, Texas Instrumentsand UnitedHealth Group.
Additionally, the ETF pays a healthy dividend with a 30-day yield of 3.22% and a trailing 12-month yield of 3.29%. This is considerably higher than the average return of about 1% in the market. S&P 500. The return can be reinvested back into the ETF to increase the total return, which could help if the market heads lower.
To see the difference, SCHD has returned around 24% over the past 12 months; but with the dividend reinvested, it is 29%. Over the past 10 years, it has had an average annualized return of 9%, but with the dividend reinvested, it is around 13%. That 4% to 5% annual increase from dividend reinvestment can make a huge difference, especially when markets are down.
2. Vanguard High Yield Dividend Index ETF
He Vanguard High Yield Dividend ETF(NYSEMKT:VYM) track the High FTSE dividend yield index, which is primarily comprised of large- and mid-cap companies that pay above-average dividends. The portfolio starts with stocks that have the highest projected 12-month returns, but then includes stocks in descending order until it reaches 50% of the universe’s market cap, excluding real estate investment trusts (REITs). The portfolio is then weighted by market capitalization,
Thus, the ETF currently owns around 608 shares. It is predominantly made up of large-cap value stocks. Its three main holdings are Broadcom, JPMorgan Chaseand ExxonMobil. While the latter two pay above-average dividends, Broadcom gets dragged down by the 50% rule and becomes the largest holding due to its cap size.
The Vanguard ETF has a lower dividend payout ratio than the Schwab ETF due to its structure. It has a 30-day yield of 2.25%. This year, the ETF is up about 11% year-to-date and has returned 26% over the past year in terms of total return. Over the past 5 years, it has had an average annualized return of around 11%, and over the past 10 years, an average return of 12%.
These are two tremendous dividend ETFs that capture different corners of the dividend universe. Both produce better than average returns and solid long-term returns, serving as excellent diversifiers in a portfolio.
Should You Buy Shares of the Schwab US Dividend Equity ETF Right Now?
Before buying shares of the Schwab US Dividend Equity ETF, consider the following:
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JPMorgan Chase is an advertising partner of Motley Fool Money. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Broadcom, JPMorgan Chase, Texas Instruments, and Vanguard High Dividend Yield ETFs. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.
2 ETFs That Pay Reliable Dividends in an Uncertain Market was originally published by The Motley Fool
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