Reuben Gregg Brewer, The Motley Fool
5 min read
The market is trading near all-time highs. To me, it increasingly looks like the mistakes of the dot-com bubble are being repeated in artificial intelligence. While there’s no way to know when it will arrive, a bear market is definitely on the way. I simply expect one to arrive sooner rather than later. Which is why I am so fond of Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) and Amplify CWP Enhanced Dividend Income ETF (NYSEMKT: DIVO). Here’s a quick look at each of these income-focused exchange-traded funds (ETFs) and why I like them so much right now.
Good businesses with growing dividends
Schwab U.S. Dividend Equity ETF uses a fairly complex screen to build its portfolio (technically, it tracks the Dow Jones U.S. Dividend 100 Index, which uses the screen, but that’s mincing words). The first step is to consider only companies that have increased dividends for at least 10 consecutive years, excluding real estate investment trusts and partnerships. That’s something that many dividend investors do, but it is just the start of the process.
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From here, Schwab U.S. Dividend Equity ETF calculates a composite score based on free cash flow to total debt, return on equity, dividend yield, and dividend growth. The 100 top-ranked companies are included in the ETF, using a market-weighting methodology that has an upper limit of 4%. In other words, the ETF is focused on holding a diversified portfolio of financially strong companies with growing businesses that have attractive and growing dividends. That’s basically what most dividend investors want, and you can get it for the tiny cost of a 0.06% management fee.
Over time, Schwab U.S. Dividend Equity ETF has provided a mix of capital appreciation and dividend growth. I know that the ETF will get hit just like the rest of the market if there’s a bear market. However, with this ETF, I enter that downturn knowing I own businesses built to survive hard times. That allows me to focus on the dividend income I collect from the ETF rather than its price.
A little protection from option income
Amplify CWP Enhanced Dividend Income ETF, a position I just increased not too long ago, takes an entirely different approach. It is actively managed, so all I can say is that it tends to buy large, reliable dividend stocks. But the real story is what it does next, as it strategically sells covered calls on a portion of the portfolio to generate income. Option income varies from month to month, so the income I collect changes regularly. However, the history here suggests that investors can expect a yield between 4% and 6% in any given year.
