Searching For Big Juicy Dividends In The USA

by: Dale Roberts

Many investors like a big juicy dividend, and at times for different reasons.

Investors can access the high yield dividend route by way of many ETF offerings.

Investors might also have a look at the index construction methods and skim from a list or lists of the index funds.

As my regular readers will know, I am a fan of growing dividends (VIG) and also big dividends (VYM). My dividend stock portfolio approach is split between the dividend growth model and that higher yield or big juicy dividend factor. My Canadian companies are more high yield by way of my Canadian Wide Moat 7, whereas for my US holdings I skim the Dividend Achievers Index. Here's an article on that adventure, Buying Dividend Growth Stocks Without Looking.

For ease and simple diversification, investors may go the ETF or Exchange-Traded Fund route. Two of the more popular funds in the higher yield area are the previously mentioned Vanguard High Dividend Yield ETF (VYM) and the Schwab U.S. Dividend Equity ETF (SCHD). One of the most-read dividend focused authors on Seeking Alpha, David Van Knapp, has selected SCHD as his dividend fund of choice as the fund is closest to the criteria that he would use when selecting individual stocks. Of course, we all have to practice that same discipline; knowing our goals and then matching the investments to those goals. Here is a very nice evaluation where David compares SCHD to the Invesco S&P 500 High Dividend Low Volatility Portfolio ETF (SPHD).

Both VYM and SCHD slant toward the higher yield; toward those big juicy dividends. That said, some investors might not consider the 3.2% yield of VYM and the 3.0% yield of SCHD to be all that juicy. But that is the environment that we live in today when we ask for a dividend growth history and a more generous yield. SCHD tracks the Nasdaq 100 US Dividend Index. That index demands companies have at least maintained their dividend over a 10-year period. The index also applies some financial filters. For more specifics, here's a link to the fact sheet.

Vanguard's VYM tracks the FTSE High Dividend Yield Index. That index demands that the companies have at least a 5-year history of dividend growth and the individual company financial evaluation is more limited.

Both funds are large cap value funds as per Morningstar.

Now when I was first writing about VYM, the documentation stated that the 5-year dividend growth was a requirement. I cannot find that detail in the current documentation from FTSE or Vanguard. Here's how Morningstar describes or summarizes the index -

By design the fund excludes real estate investment trusts, and its holdings are market-weighted, keeping its utilities allocation from growing big. The fund strikes a balance among market representation, yield, and quality. Its construction is straightforward: Each year it ranks stocks by their forward dividend yield according to consensus analyst estimates and includes the highest-yielding ones in its portfolio until 50% of the eligible universe's aggregate market capitalization is reached. VYM excludes stocks forecast to not pay a dividend in the coming year.

All said, the funds turn out to be more than similar given that they are mostly large cap funds seeking those bigger dividends. Here are the top ten holdings of SCHD.

And here are the top ten holdings of VYM.

Of the top ten holdings in SCHD, PepsiCo (PEP) Procter and Gamble (PG), Pfizer (PFE), Verizon (VZ), Walmart (WMT), Exxon Mobil (XOM) International Business Machines (IBM) and 3M (MMM) all are in VYM except for Home Depot (HD) and Union Pacific (UNP). Of the next 10 holdings in SCHD - Intel (INTC), Altria (MO), Texas instruments (TXN), Qualcomm (QCOM) United Parcel (UPS), Lockheed Martin (LMT), CVS Health (CVS), Automatic Data Processing (ADP), Valero Energy (VLO), and Emerson Electric (EMR) - are ALL in VYM. It should not be surprising that the funds have near identical performance as they are nearly identical funds. Both funds of course are cap weighted, meaning the top 20 companies hold a considerable concentration of the total fund weighting.

Here are the sector weightings.

And for VYM.

While differences in sector allocation is certainly present, the greatest variance might be with respect to SCHD holding a greater concentration in Consumer Goods (staples and discretionary), Technology and Industrials, while VYM has a 16.4% allocation to financials compared to 5% for SCHD. In fact, SCHD is nearly 75% concentrated in its top 3 sectors. VYM is obviously much more evenly diversified across sectors. That may have some impact on performance when we move through any rough waters. Here's my article that looked at the performance of sectors through the last two recessions - The Lowest Volatility Sectors for Retirees.

That said, those differences to date are all for naught. Here's the returns history from SCHD inception, courtesy of Portfolio 1 is SCHD. Portfolio 2 is VYM.

The total returns might be seen as a virtual tie, and what is uncanny is that the Sharpe Ratio and Sortino Ratios are also almost identical. The funds have essentially delivered the same risk-adjusted returns. The standard deviation is slightly less for VYM. That said, let's call it a draw. There is enough overlap in the funds to create that event. Once again folks, when you buy enough of the same types of companies, you start to replicate the total returns and performance characteristics of the underlying index. These funds to date are replicating the larger cap US big dividend space. Their differences are not yet enough to separate the funds in performance or characteristics.

Here is the annual returns breakdown for the funds.

Even year by year it's a challenge for the funds to show much separation. Ditto if we have a look at another big dividend payer fund that demands a 20-year history of paying dividends with more of a mid-cap slant, SPDR Dividend ETF (SDY). We'll also throw in the utility-heavy iShares Select Dividend ETF (DVY). Portfolio 1 is SCHD. Portfolio 2 is SDY. Portfolio 3 is DVY.

Once again, it's hard to find separation when we are in an extended bull market run, when perhaps the companies or dividend fund styles are not being challenged for financial strength and dividend sustainability. In this next chart, we'll substitute VYM as Portfolio 1 to allow us to move through the market correction of 2007-2008. Portfolio 2 is SDY. Portfolio 3 is DVY. We then begin to see some separation, and perhaps that mid-cap slant of the SDY delivers on the promise of slightly better returns. We see different risk/return characteristics. It is the market corrections that can separate investments, and investors.

So that brings us back to VYM vs. SCHD. One's preference may come back to potential performance through a market correction. I would give SCHD marks for potentially greater stability given that the companies have paid a dividend for 10 years or more, and the added concentration in consumer staples and discretionary. We know that indices such as The Dividend Achievers (VIG) and The Dividend Aristocrats (NOBL) offered a lesser drawdown in the last recession and major market correction.

And of course, some dividend investors value the dividend income before the total return consideration. Here's the dividend income comparison with dividend reinvestment. Again, Portfolio 1 is SCHD. Portfolio 2 is VYM. Slight advantage goes to VYM. The following is based on an initial investment of $10,000.

That said, you may know that I am an index skimmer. The above comparisons once again provide evidence that it does not take many to replicate an index and that most similar styles or factors in the large cap universe will deliver similar returns and characteristics. Given that one could skim the largest cap 20 holdings in SCHD or VYM; one could move further down the list to shape their portfolio to more of a mid cap tilt, or they could pull from the full lists and shape the portfolio for great current income.

PEP delivers 3.2%, PG 3.5%, PFE 3.35%, VZ 4.5%, XOM 4.1%, MO 4.7%, QCOM 3.8%, CVS 3.1%, T 6.2%, CSCO 3.1%, GE 3.6%, SLB 3.0%, QCOM 3.8%, UPS 3.0%, OXY 3.8%, DUK 4.4%, GM 4.0%, SO 4.9%, D 4.6%, F 6.0%.

That said, the above 20 higher yielders from the higher yields funds might shape your portfolio in different ways beyond simply stretching for yield. It might become more of an income and value play as many of these companies are out of market favour. You might be able to grab some greater current yield, but you might take on greater sector concentration risks and perhaps the market has it right about a few of these companies, that they have hit hard times that might continue for quite some time. I will track these higher yielding 20 moving forward.

I personally think that with the decent yield and dividend growth of the index funds, there is ample income, even to meet the needs of most retirees who seek income and income growth. I am also of the camp that generous dividends in tandem with share harvesting is the way to the greatest and most reliable income for retirees. In David Van Knapp's initial SCHD article, he detailed how SCHD has outperformed his own stock evaluation process by over 3% annual. The greater total return performance would have more than compensated for the lesser income of SCHD vs. the DVK portfolio. I would also suggest that if one is in the accumulation stage, that they simply try to make the most money. Entering retirement with more money is obviously 'more better'.

Now of course, if I am going to write about big juicy dividends, I have to bring it all back to my article, Those Big Juicy Dividend Beat The Market In Canada, U.S. and International.

You might want to have a read of that Editors' Pick article. It details the MSCI High Dividend Yield Indices, an approach that has beat the market in those 3 regions with respect to total returns. For the US Index, here are the top 10 holdings, look familiar? Skim away. That index also applies dividend health screens and seeks companies that pay a dividend that is at least 30% greater than market average.

I am a big fan of that index, in my previous life, I was also able to offer that in a Portfolio Format at Tangerine Investments. I now have that as a portfolio suggestion at in the ETF Model Portfolio section.

US investors will have to stick to skimming to capture that index.

If you're looking for big dividends in the US large to mid-cap space, I hope this article was a big help.

Author's note: Thanks for reading. Please always know and invest within your risk tolerance level. Always know all tax implications and consequences. If you liked this article, please hit that "Like" button. If you'd like notices of future articles, click the "Follow" button.

Happy Investing.


Disclosure: I am/we are long AAPL, NKE, BCE, TU, ENB, TRP, CVS, WBA, MSFT, MMM, CL, JNJ, QCOM, MDT, BRK.B, ABT, PEP, TXN, WMT, UTX, LOW, BNS, BLK.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.