Dividend ETFs are enjoying their moment in the sun this year despite a down economy. Dividend stocks, in general, are one of the few ways to fight inflation. One report indicates that, in some historical cases, dividends offset massive stock losses to leave investors effectively flat (compared to wide market losses). At the same time, since dividend reinvestment is a breeze today, you can easily build a larger position ready for a market rebound through dollar-cost averaging.
Of course, stock picking isn’t everyone’s bag – especially in uncertain times. This is where dividend ETFs shine. Rather than staking a claim on a handful of dividend stocks, you gain exposure to many at once and reduce the risk and volatility associated with a handful of companies.
But be careful. Many of the “best” dividend ETFs comprise the same handful of big names in the industry. To best expand your horizons, find dividend ETFs with limited overlap that offer diversified exposure. These three dividend ETFs meet that criteria. I plugged each into a theoretical portfolio allocation. That model found that these three dividend ETFs offer even sector distribution across cyclical, sensitive and defensive industries. At the same time, there’s minimal overlap between specific companies. Minimal overlap means you aren’t overexposed to the risk of building a large position in a handful of stocks.
Schwab U.S. Dividend Equity ETF (SCHD)
Expense ratio: Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) is one of the most popular dividend ETFs, with good reason. The ETF’s low expense ratio, 0.06% ($6 annually on a $10,000 investment) doesn’t cut into your bottom line too badly. At the same time, SCHD offers access to the top dividend-producing companies. Core holdings include Amgen (NASDAQ:AMGEN), Verizon Communications (NYSE:VZ), and Merk & Co (NYSE:MRK). These and more dividend stocks combine to offer a 3.93% SEC yield today.
SCHD’s base is built on the Dow Jones Dividend 100, which requires stocks to increase dividends for ten consecutive years. At the same time, they must have sufficient financial strength to keep the trend running. That index serves as a strong diversification tool, returning 6% throughout the past five years and fairly low volatility.
Schwab International Dividend Equity ETF (SCHY)
International diversification is a cornerstone of well-planned investing. At the same time, though, finding international companies worth buying is a risky proposition. Schwab International Dividend Equity ETF (NYSEARCA:SCHY) cuts that risk by tracking the Dow Jones International Dividend 100 index. This index has similar parameters to its United States-based peer. And SCHY, like SCHD, offers low expense fees of just 0.14% ($14 annually on a $10,000 investment).
SCHY offers exposure to best-in-class international stocks, including Nintendo (OTCMKTS:NTDOY, OTCMKTS:NTDOF), Unilever (NYSE:UL), and British American Tobacco (NYSE:BTI). In this case, rather than trying to figure out the difference between NTDOY and NTDOF or finding ways to invest internationally, SCHY does the legwork for you. At the same time, it beats its U.S. peer with a hefty 4.69% SEC yield. That comes close to beating increasingly fixed-income investment strategies, with the additional upside of capital gains as international markets grow.
Invesco S&P SmallCap High Div Low Vol ETF (XSHD)
Invesco S&P SmallCap High Div Low Vol ETF (BATS:XSHD) rounds out a diversified dividend ETF portfolio by offering a range of smaller stocks. XSHD’s small-cap status is especially compelling, considering those stocks typically outperform blue chips immediately after economic downturns. So, building a position in XSHD today diversifies your portfolio while positioning it for massive upside once the “don’t call it a recession” recession is over.
XSHD’s low expense ratio, 0.3% ($30 annually on a $10,000 investment), combines with a massive 8.17% SEC yield to make it the perfect investment that captures income and growth potential. An 8% yield is hard to come by even today, and you can only usually capture safe-ish gains like that through riskier junk bonds or high-yield bond ETFs.
XSHD also offers investors greater access to real estate investment opportunities compared to large-cap dividend ETFs, holding 33% in REITs or similar stocks. REITs are a long-term income play, considering recent underperformance, and XSHD removes the risk factor of seeing a few REIT selections nosedive like Realty Income (NYSE:O) did this week.
Ultimately, XSHD blends growth and income as a cornerstone for a well-rounded dividend ETF portfolio alongside stabler peers like SCHD and SCHY.
On the date of publication, Jeremy Flint held no positions in the securities mentioned. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.