What Are Your Criteria?

Easy Income Strategy – the best ETF is…?

What coffee is your favorite? I like Community Coffee’s Signature Blend Dark Roast Coffee. That isn’t to say there aren’t other good coffee choices. When I am asked who has the best gluten free pizza in the Madison, Wisconsin area, I have an answer. But the answer is based on my criteria and my admittedly limited exposure to every place that makes pizza. Investing has similar characteristics.

Part of the problem with comparing two ETFs or the stock of two different companies is that you can find something to like in just about any investment.  For example, one ETF or stock might have a better yield, a better dividend growth history, better diversification, or better price growth. Which of these is most important?

The key is, I believe, to find investments that align with your strategy, your rational risk management thinking, your long-term goals, and your income needs. Risk, by way of reminder, is not stock market volatility. Risk is paying more for an asset that is worth less than what you pay for it. It has nothing, or very little to do with what the other traders think about the investment five days after you buy it. Of course, there are certainly exceptions, but the general rule is “accept volatility and avoid risky investments.”

With that as background, I want to review four ETFs at the request of one of my readers. His question: “Wayne — How about a comparative analysis of VYM, SCHD and FDVV? Would VYM still be your pick?” The short answer, is “yes, I would still pick VYM over FDVV.” Now let me explain why.

Ratios and Results Tell a Story

The “Top Scores” are based on my prerequisites for an ETF. For example, expenses matter. If the five-year and ten-year price performance is lackluster, why pay more for fund management? AUM (Assets Under Management) tells a story as well. Small funds like FDVV may not be the most liquid. On any given day far more shares of VYM, SCHD, and DGRO are traded than shares of FDVV.

In addition, I will have a preference for a fund that has a higher number of holdings and less turnover (buying and selling of assets by the ETF manager.)  Notice that SCHD and VYM have a longer history of consecutive years of dividend growth. If I pull all of this together, then the things I consider important cause VYM (8 top scores) to be number one, SCHD number two, and DGRO number three. FDVV is a distant fourth place. Even then it is only because of dividend yield.

What can we learn from ratios and results? We learn that FDVV is not the star of the group.

Seeking Alpha Scores

Now consider the QUANT scores and Weiss Ratings. FDVV really isn’t bad, but in comparison to the other three it is a bit weak. In this piece, I would certainly like SCHD, VYM and DGRO. In fact, DGRO is the strongest candidate. As a result, we own shares of DGRO, SCHD, and VYM for better diversification. I want easy income with diversification. DGRO has far more positions than FDVV and has a higher ranking in the asset class and subclass ranking.

Seeking Alpha Scores and Asset Class Rankings

Weiss Ratings Comparison

VYM and SCHD narrowly beat both FDVV and DGRO from a Weiss Ratings perspective. While I no longer subscribe to Weiss, I am usually curious about the ETF investment ratings from multiple sources. FDVV is “safe” but not a shining star.

Weiss Ratings Compared

Five- and Ten-Year Price Return

Even if we ignore dividends, FDVV is not a star performer. It is time to ask the same question: “Why would you pay a higher expense ratio for comparably poor price performance for the four ETFs we are considering?

FDVV beats VYM in five-year returns, but not in 10-year returns.
In fairness, FDVV has not been around for ten years. But it is still a weak performing ETF.

Annualized Dividend History

Dividends matter. Is FDVV a good dividend growth investment? It isn’t in my opinion. Annual dividend growth is rather unreliable. I believe this is due, in part, to the 38% turnover ratio. FDVV is chasing returns and failing, and the fallout from this buying and selling of stocks is also eating into dividends.

When FDVV chases returns it seems to miss out on dividend growth as well.
VYM, on the other hand, seems to have a longer history of dividend growth without excessive trading.
Like VYM, SCHD has shown consistent, positive dividend growth.
If the ticker symbol suggests “dividend growth” (DGRO) there is should be dividend growth.

Which ETF is the Best Brew?

If you have different criteria based on a different strategy, then perhaps FDVV is a good investment. Based on my criteria, it is adequate at best. The reality is that SPY would be a far better choice than FDVV.

Reminder: What is EIS?

EIS is my abbreviation for “Easy Income Strategy.” Each value needs to be at least a “3” or I will pause and not rush to buy. If most of the values are “4” or “5”, I will either buy, or continue to hold or add more shares. Therefore, “5” is a strong reason to buy, “4” is a good reason to buy, and anything lower than a “3” is a cause for potential concern.

Conclusion

VYM fits my requirements as a long-term ETF income investment. It is in our top five investments. I also like SCHD and DGRO for diversification.

Full Disclosure

We currently own 2,545 shares of VYM. I plan to continue to add shares over the next several years. I am also willing to add to our SCHD and DGRO investments.

The Easy Income Strategy – What is Easy Income?

We need to define “easy.” When I say easy, I don’t mean there is no work involved. Rather, the term is meant to convey simplified, unhurried, user-friendly, and uncomplicated. Therefore, it isn’t about trying to sell something, and it certainly isn’t about trading options. It also isn’t about trying to time the market with a buy low and sell high strategy. It is about a process that results in income, and the primary goal is to minimize the time spent while maximizing income that grows over time.

Easy Money is Easy

Easy money is money you can easily acquire. It is income obtained with a minimum of effort. It sounds too good to be true. In fact, most of the time when someone pitches something that is too good to be true, it isn’t true. I think there are some exceptions.