The Two Best Dividend ETFs of 2024 (In My Opinion): SCHD & DGRW

Before we dive into the specifics, I want to clarify why I'm a proponent of dividend investing—though perhaps not for the reasons you might think. I'm not targeting dividend ETFs primarily for income generation or to "snowball" wealth through compounding returns.

Instead, my interest in dividend ETFs stems from their ability to capture specific Fama-French factors that are known to contribute to potential outperformance.

These factors include value (high minus low, or HML) and quality, in the form of investment (conservative minus aggressive, or CMA) and profitability (robust minus weak, or RMW).

The focus on dividend ETFs here lies in the cost-effectiveness of achieving such factor exposures. While factor ETFs are often marketed as the go-to for capturing these dimensions of expected returns, they can also come with higher fees.

Interestingly, it turns out that the indexes utilized by various dividend ETFs can achieve similar exposure to these factors but at a lower cost. This realization opens up a strategic avenue for investors who are savvy about the underlying drivers of stock returns but are also mindful of managing investment costs.

Here are two dividend ETFs that particularly stand out in 2024 to me, not just for their dividend focus but for their strategic index methodologies and low fees.

Schwab US Dividend Equity ETF (SCHD)

SCHD may have faced a rough patch in 2023 and 2024 after its standout performance in 2022, but I maintain that it remains a solid core holding, particularly for value investors.

Firstly, SCHD is remarkably cost-effective with an expense ratio of just 0.06%. Cost efficiency is crucial for long-term investment success, and SCHD hits the mark perfectly here.

Secondly, its benchmark, the Dow Jones U.S. Dividend 100 Index, employs some stringent and fundamentally sound screening criteria that I find particularly useful.

The process begins with identifying stocks that have managed at least 10 years of consecutive dividend payments, which is a testament to their financial stability and reliability. Once stocks pass this initial screening, they are further assessed and ranked based on their annual dividend yield.

They are then evaluated on four key fundamental factors: free cash flow to total debt, return on equity, dividend yield, and five-year dividend growth rate. This rigorous analysis helps isolate the top performers based on financial health and dividend reliability.

The resulting top 100 stocks are then equally weighted to form the index, with quarterly rebalancing and an annual reconstitution. Here's a look at the current portfolio but remember – this can change significantly during the annual reconstitution with a 29.81% turnover rate.

According to the factor regression summary provided, SCHD exhibits strong loadings across value, profitability, and investment—key factors that are often associated with outperformance. This positions SCHD comparably to multi-factor funds, yet it comes at a fraction of the cost.

Moreover, for those who prioritize income, SCHD offers a 30-day SEC yield of 3.72% as of July 25th, 2024. Again, I'm not big on yield, but if you want higher income SCHD delivers that.

WisdomTree U.S. Quality Dividend Growth Fund (DGRW)

I'm a big admirer of Professor Jeremy Siegel’s research, especially his seminal work, "Stocks for the Long Run." His advocacy for fundamental indexing—weighting stocks based not on market cap but on metrics that underpin long-term company performance—really resonates with me.

This concept is vividly brought to life with DGRW. While DGRW may not be the cheapest or highest yielding dividend ETF, with an expense ratio of 0.28% and a 30-day SEC yield of 1.48%, it stands out as one of the best in terms of total returns, which, after all, is what truly matters.

Don't get too caught up on the yield aspect alone. DGRW has earned a five-star Morningstar rating, indicating that it has significantly outperformed the majority of its peers in risk-adjusted returns. If you screened dividend ETFs by yield, you would've missed this top performer.

How does DGRW achieve this? Its benchmark, the WisdomTree U.S. Quality Dividend Growth Index, selects from the constituents of the WisdomTree U.S. Dividend Index, which have a minimum market capitalization of $2 billion.

The top 300 companies are chosen based on a combined ranking of growth (long-term earnings growth expectations) and quality factors (three-year historical averages for return on equity and return on assets).

Importantly, DGRW is not market cap-weighted—or worse, arbitrarily equal-weighted—but is fundamentally weighted by the projected share of the aggregate cash dividends for the coming year. This approach helps ensure that the ETF is investing in companies not just based on size but on their financial health and growth prospects.

The results? As indicated in the factor regression, DGRW exhibits higher loadings to profitability and investment (RMW and CMA), both quality metrics, than even some well-known quality factor ETFs.

Its total returns stand at 13.19%, closely trailing the SPDR S&P 500 ETF (SPY) which posted returns of 13.25%. Remember, this is after accounting for a higher expense ratio of 0.28% compared to SPY’s 0.0945%. Moreover, the risk-adjusted return of DGRW is even more impressive with a Sharpe ratio of 0.7, compared to SPY’s 0.65, indicating more return for less volatility.