The S&P 500 is great if you want to track the market, but what if your goals are a little different? For example, you need income...
Investing isn't a one-size-fits-all situation, which is why there are so many different investment approaches you can follow. And yet the common reference point for most investors is the S&P 500 (^GSPC 0.80%) index. Here's one big problem for a retired investor in need of income who just defaults to the S&P 500: The index's dividend yield is a scant 1.3% today. It would be hard for a dividend investor to live off of that, which is why a better option would be Schwab U.S. Dividend Equity ETF (SCHD 1.84%), which has a yield of nearly 3.5%.
There's nothing wrong with the S&P 500 Index
As far as indexes go, the is fairly well constructed. For starters, it owns a large number of stocks, providing diversification. The stocks are selected based on their size and importance to the U.S. economy, so they are notable companies, not obscure businesses. The stocks in the index are weighted based on market cap, so the largest stocks have the most influence on the index's performance. That's pretty representative of the real world, and it ensures that anyone who owns the index is putting more money into the best-performing stocks (which are usually, though not always, the largest ones).
Image source: Getty Images.
But just because an index is well constructed doesn't mean it is the right index for every investor to own. As noted, the yield on the S&P 500 Index is a slim 1.3%. That's a very small number, and it would require a huge investment to generate a meaningful level of dividend income if you just owned an S&P 500-tracking exchange-traded fund (ETF) like SPDR S&P 500 ETF Trust (SPY 0.91%). A better bet would be to buy an ETF that is focused on generating dividend income. A good option is Schwab U.S. Dividend Equity ETF, which offers a yield that's nearly three times the size of what you'd collect from an S&P 500 tracking ETF.
What does Schwab U.S. Dividend Equity ETF do?
Before you buy Schwab U.S. Dividend Equity ETF, or any ETF for that matter, you need to dig into the investment methodology. In this case, the ETF is trying to create a balance between quality and dividend yield. That's notably different from an ETF like SPDR Portfolio S&P 500 High Dividend ETF (SPYD 2.17%), which simply buys the 80 highest-yielding stocks in the S&P 500 index.
To get its final list of about 100 stocks, Schwab U.S. Dividend Equity ETF first removes real estate investment trusts (REITs). It then screens for companies that have increased their dividends annually for 10 consecutive years. This is the base list of investment candidates. For each of these potential investments, it creates a composite score using cash-flow-to-total debt, return on equity, dividend yield, and the five-year dividend-growth rate. The scores for each company are ranked from best to worst, and the top 100 are the ones that get into Schwab U.S. Dividend Equity ETF.
The end result isn't an income-focused ETF, per se, but an ETF that tries to ensure that investors own good companies with growing businesses and attractive yields. All in all, based on the investment approach, Schwab U.S. Dividend Equity ETF sounds like it would be a pretty good option for most dividend investors who want a simple way to invest in dividend stocks. Pair that with a broad-based bond fund, perhaps like Vanguard Total Bond Market Index ETF (BND 0.36%), and you have a fairly solid foundation for a balanced portfolio. Notably, Vanguard Total Bond Market Index ETF has a yield that's a bit over 3.3%. You could probably do better than that if you were willing to take on more fixed-income risk.
Investing isn't one-size fits all
The S&P 500 index is great, but it isn't the right investment option for every investor. For example, the S&P's goal is just to represent the broader economy, which is not going to serve dividend investors very well. If you are looking for income, an ETF like Schwab U.S. Dividend Equity ETF will probably be a better choice. It is specifically designed to meet the needs of dividend investors looking to own high-quality growing businesses that pay attractive dividends.
Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Bond Index Funds-Vanguard Total Bond Market ETF. The Motley Fool has a disclosure policy.
FAQs
A better bet would be to buy an ETF that is focused on generating dividend income. A good option is Schwab U.S. Dividend Equity ETF, which offers a yield that's nearly three times the size of what you'd collect from an S&P 500 tracking ETF.
What ETF outperforms the S&P 500? ›
The 3 Best ETFs to Beat the S&P 500 Through 2030
- VanEck Semiconductor ETF (SMH)
- Invesco S&P 500 Quality ETF (SPHQ)
- Invesco S&P MidCap Momentum ETF (XMMO)
Key Points. The S&P 500's track record is impressive, but the Vanguard Growth ETF has outperformed it. The Vanguard Growth ETF leans heavily toward tech businesses that exhibit faster revenue and earnings gains. No matter what investments you choose, it's always smart to keep a long-term mindset.
Should I invest in ETF or S&P 500? ›
Choosing your investments
Investing in an S&P 500 fund can instantly diversify your portfolio and is generally considered less risky. S&P 500 index funds or ETFs will track the performance of the S&P 500, which means when the S&P 500 does well, your investment will, too.
Is seeking alpha better than Motley Fool? ›
The Motley Fool is ideal for beginners to intermediate investors looking for growth-focused stock recommendations and straightforward advice. Seeking Alpha suits more experienced investors who value a wide range of analytical perspectives and detailed data.
Which index ETF has the highest return? ›
100 Highest 5 Year ETF Returns
| Symbol | Name | 5-Year Return |
|---|
| FNGU | MicroSectors FANG+™ Index 3X Leveraged ETN | 62.61% |
| FNGO | MicroSectors FANG+ Index 2X Leveraged ETNs | 55.62% |
| SOXL | Direxion Daily Semiconductor Bull 3x Shares | 47.91% |
| TECL | Direxion Daily Technology Bull 3X Shares | 44.20% |
93 more rowsYou only need one S&P 500 ETF
You could be tempted to buy all three ETFs, but just one will do the trick. You won't get any additional diversification benefits (meaning the mix of various assets) because all three funds track the same 500 companies.
What ETF is better than the S&P 500? ›
The S&P 500 Index is a highly followed, broad-based market index. The S&P 500 does a good job of tracking the market, but that doesn't mean it will suit your investment needs. If you are retired and trying to maximize the income you generate, you should consider Schwab U.S. Dividend Equity ETF.
Which ETF has the best 10 year return? ›
1. VanEck Semiconductor ETF
- 10-year return: 24.37%
- Assets under management: $10.9B.
- Expense ratio: 0.35%
- As of date: November 30, 2023.
Life Beyond the S&P 500
| Fund / Ticker | Morningstar Category | Expense Ratio |
|---|
| Marshfield Concentrated Opportunity / MRFOX | Large Growth | 1.01 |
| Pacer US Cash Cows 100 / COWZ | Mid-Cap Value | 0.49 |
| Smead Value / SMVLX | Large Value | 1.25 |
| SPDR Portfolio S&P 500 Value / SPYV | Large Value | 0.04 |
15 more rowsApr 8, 2024
Over the past decade, you would have done even better, as the S&P 500 posted an average annual return of a whopping 12.68%. Here's how much your account balance would be now if you were invested over the past 10 years: $1,000 would grow to $3,300. $5,000 would grow to $16,498.
What is the best ETF to buy right now? ›
- Top 7 ETFs to buy now.
- Vanguard 500 ETF.
- Invesco QQQ Trust.
- Vanguard Growth ETF.
- iShares Core SP Small-Cap ETF.
- iShares Core Dividend Growth ETF.
- Vanguard Total Stock Market ETF.
- iShares Core MSCI Total International Stock ETF.
One option for a solid three-ETF portfolio could be to include the Schwab U.S. Dividend Equity ETF (SCHD), the Vanguard S&P 500 ETF (VOO), and the Invesco QQQ Trust (QQQ). The SCHD ETF focuses on high-quality dividend stocks, which can provide stable income and potential long-term growth.
Is it worth paying for Motley Fool? ›
For investors looking for stock ideas and actionable guidance, Motley Fool is likely worth the reasonable annual fees. The stock research alone can pay for the membership cost if you invest in just a couple successful picks. However, more advanced investors doing their own analysis may not find sufficient value-add.
What is Motley Fool's top AI stock? ›
The Motley Fool recommends Gartner and Intel and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft, and short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
What is the alternative to the Motley Fool? ›
Top 10 The Motley Fool competitors
- Wealthfront.
- Stock Target Advisor.
- TradingView.
- Betterment.
- TheStreet.
- TD Ameritrade.
- Kiplinger.
- MyWallSt.
The Direxion Daily S&P 500® Bull 2X Shares seeks daily investment results, before fees and expenses, of 200% of the performance of the S&P 500® Index.
Does Vanguard outperform the S&P 500? ›
Tech trends have accelerated more recently, which is why the Vanguard Information Technology ETF has performed even better over the last 10 years, with a compound annual gain of 19.8%. That compares to a 12.4% yearly gain in the S&P 500.
Does QQQ outperform sp500? ›
QQQ, which has $255 billion of assets under management, has exceeded the the S&P 500's gains since the Nasdaq-100-tracking fund launched 25 years ago, according to FactSet data.
Which sectors outperform S&P? ›
The best performing Sector in the last 10 years is Information Technology, that granded a +19.94% annualized return. The worst is Energy, with a +4.01% annualized return in the last 10 years. The main S&P 500 Sectors can be easily replicated by ETFs.
