For dividend enthusiasts, the Schwab U.S. Dividend Equity ETF and Alerian MLP ETF present compelling opportunities to enhance your investment portfolio.
The financial markets continue to trend upwards, significantly propelled by major technology firms. As a result, many investors find their portfolios disproportionately weighted towards growth stocks without even realizing it. While growth stocks have demonstrated impressive performance over extended periods, history shows that these booms are often temporary. For instance, looking back at previous market cycles, such as those in the 1980s and the aftermath of the dot-com bubble, it was the value stocks that ultimately led the charge.
This observation underscores the importance of diversifying your portfolio during such times by incorporating income-generating assets. Utilizing a strategy like dollar-cost averaging can be particularly effective, as it allows you to invest consistently over time without the stress of trying to time the market accurately. You can initiate this investment strategy with a modest amount, such as b,000, and allow the power of compounding to work in your favor over the long haul.
Now, let’s delve into two exceptional dividend-focused ETFs worthy of consideration for your investment strategy.
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Discover the Benefits of the Schwab U.S. Dividend Equity ETF
The Schwab U.S. Dividend Equity ETF (SCHD -0.38%) is tailored for investors seeking high-quality companies that exhibit robust financial health and a reliable history of increasing dividends. This ETF tracks the Dow Jones U.S. Dividend 100 Index, which meticulously evaluates factors such as cash flow relative to total debt, return on equity (ROE), forward dividend yield, and the five-year dividend growth rate. This rigorous screening process helps to filter out lower-quality stocks that can sometimes infiltrate dividend funds.
Consequently, the ETF comprises approximately 100 companies primarily from sectors like consumer staples, healthcare, and financials. These sectors are typically characterized by lower volatility and more consistent free cash flow compared to many growth stocks. Presently, the ETF offers a yield close to 4%, making it an attractive option whether you choose to reinvest those earnings or utilize them as income.
Over the past decade, this ETF has impressively returned over 12% annually, surpassing many other value funds. With a remarkably low expense ratio of just 0.06%, investors can minimize costs effectively.
While the Schwab U.S. Dividend Equity ETF may not achieve the explosive short-term growth typical of a trending tech stock, it serves as a stable investment option that can provide consistent income over time.
Unlocking Yield Potential with the Alerian MLP ETF
If you’re aiming for even higher yields and are open to including energy stocks in your portfolio, the Alerian MLP ETF (AMLP -1.86%) is an excellent choice. This ETF holds a diversified collection of midstream energy companies structured as master limited partnerships (MLPs). These entities manage pipelines, storage facilities, and processing plants, operating more like toll roads that earn fees based on the volumes of energy transported, rather than speculating on fluctuating oil and gas prices.
Midstream companies are known for their capital-intensive operations; however, they typically secure long-term contracts that provide a reliable stream of cash flow, which is then distributed to investors as dividends. The Alerian MLP ETF boasts a trailing yield of approximately 8.2%, ranking it among the highest yields available in the ETF market.
The midstream sector has significantly improved its financial health over the last decade. Many of the previously favorable incentive distribution rights for general partners have been eliminated, resulting in stronger balance sheets. Companies are now funding growth initiatives through cash flow rather than frequent equity raises, leading to improved coverage ratios and reduced leverage across the industry.
Despite these advancements, the valuations in this sector remain below pre-pandemic levels, with many of AMLP’s primary holdings trading at or below 10 times enterprise value to earnings before interest, taxes, depreciation, and amortization (EBITDA). This contrasts with the MLP sector, which has historically traded at an average multiple of 13.7 EV-to-EBITDA from 2011 to 2016.
Recently, the ETF has performed remarkably well, achieving an average annual return of 24.7% over the last five years. For investors seeking substantial income and steady distribution growth, AMLP offers exposure to some of the most efficiently managed MLPs while sparing you the complexities associated with K-1 tax forms.
Strategic Investment Approach for Growth and Stability
In a market that is experiencing record high valuations and is predominantly driven by growth stocks, both the Schwab U.S. Dividend Equity ETF and the Alerian MLP ETF present attractive alternatives. They provide a strategic means to balance your portfolio in anticipation of a market shift towards value stocks. Begin your investment journey with a modest sum, and maintain a routine of monthly contributions through dollar-cost averaging to build lasting wealth over time.
Geoffrey Seiler holds positions in the Alps ETF Trust-Alerian MLP ETF. The Motley Fool does not hold positions in any of the stocks mentioned. The Motley Fool adheres to a disclosure policy.
