Chocolate Flavors and my Favorite(s)
Many things in life come in different flavors. I happen to like chocolate. But that doesn’t really help you if you go to the store to buy me a gift. There is milk chocolate, semi-sweet chocolate, white chocolate, chocolate with nuts, chocolate with peanut butter, and dark chocolate. I happen to like dark chocolate. In my desk I have dark chocolate covered almonds. I also have a dark chocolate candy bar. I like Hershey’s dark chocolate miniatures. I like dark chocolate covered raisins. The same complexities come into play with different investment flavors.
VYM SCHD DGRO and DVY
During the course of helping others, I create a set of images and commentary to help a new retiree think about how they might want to invest in their retirement years. On Saturday I had that conversation with a newly-retired friend. What follows are the images and comments I sent to help him invest his dollars in a way that will provide growth, income, and reasonable diversification.
I started by telling him what I always want to know: What is the expense ratio? Is there good diversification with little overlap with what I already own? Is there a decent dividend growth opportunity so that inflation can be managed with increasing income? Are the Seeking Alpha ratings such that the rewards are worth the risks?
Seeking Alpha ETF Grades and Expense Ratios
All four of the ETFs I usually recommend have decent grades and rational expense ratios. Of the four, DVY has the highest expense ratio. At present Cindie and I do not hold any shares of DVY.
Dividends Matter but CAGR is Most Important
Here is a dividend comparison of the four. Do not just look at DIVIDEND YIELD. Although DVY has a better current yield than DGRO, DGRO has a better 5-year CAGR (Compound Annual Growth Rate). In fact, VYM, SCHD and DGRO all beat DVY in that regard. This is an important factor to remember because inflation is a silent killer.
PERFORMANCE also matters.
This image looks at the long-term performance. You want to see 5-year performance of at least 40% for most investments. A ten-year is an even better indicator. In this case, DVY has done better in the last year. However, SCHD has done the best in the 10-year performance category. That is why I recommend investing in 2-3 different ETFs.
All four of the ETFs have investments in at least 100 companies. This spreads your risk out over many different types of businesses and sizes of businesses. Obviously, VYM and DGRO offer the most diversification. But you should also notice that the percentage of investments in the top ten investments in each fund varies widely.
For SCHD, a little more than 40% of the fund’s assets are in the top ten companies. If those top ten do well, the fund will do very well. I like VYM because it has the largest number of holdings and the smallest percentage of assets in the top ten, with the exception of DVY, which beats VYM in that category. There is no “right” answer. I’m just showing you how to compare different ETF investments.
Avoid too Much Overlap and Misguided Concentration
New investors often miss looking at “what is in the top ten” investments of an ETF or mutual fund. You don’t want to have too much overlap in the top ten. For example, it is possible to buy three different S&P 500 index funds, like SPY, and wind up with three of what is really the same set of investments. For example, if you bought SPY, VOO and IVV, all S&P 500 index funds, you would be investing in the same set of companies with the same ten in the top ten. That is not prudent diversification. On the next page we compare the four ETFs I recommend. SPY is SPDR S&P 500 Trust ETF. IVV is iShares Core S&P 500 ETF. VOO is Vanguard S&P 500 ETF.
TOP TEN HOLDINGS
One of the reasons an investor might want to consider a large VYM holding is that these companies in the top ten are all very good investments. It includes companies in health care, finance, consumer discretionary, energy, and information technology. This is business sector diversification.
SCHD has some of the same companies, but in a different mix. Furthermore, there are some in the top ten that are different. This increases diversification. DGRO has some of the same investments found in the first two. However, remember that DGRO also has better performance.
Finally, DVY seems to be somewhat unique in the top ten. However, be aware that two of the top ten are tobacco companies: Altria and Philip Morris International. Before you reject DVY, however, remember that you won’t find many ETFs that are perfect in this regard. Somewhere in VYM’s 400+ companies you will probably find Altria and Philip Morris. The difference will be that fewer dollars are in those types of companies.
Finally, I gave my friend a specific recommendation based on the total dollars he has available to invest. Sometimes an investor, in addition to these four ETFs, may want to include individual companies in their investment choices. Others, with assets greater than $250,000, might consider real estate (REIT’s) and business development companies (BDC’s) in their total portfolio.
Cindie and I own 2,350 shares of VYM as a long-term investment. We also have smaller positions in SCHD and DGRO.