The Newest Way to Score Great Dividends

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Two huge trends have rocked the investing world. Struggling to make their investment dollars produce the income they need, investors have swarmed to stocks that pay healthy dividends to their shareholders. At the same time, they've turned to exchange-traded funds in order to simplify their investing.

Like a candy maker finding that two great tastes taste great together, some wily ETF providers have discovered that the best way to tap into both of those trends is by creating the peanut-butter cup of the investing world: dividend ETFs. But although some strong ETFs have focused on dividend stocks for years, a new entry from Schwab (NYS: SCHW) seeks to take a different path toward giving ETF investors their daily dose of dividends.

Finding a middle ground
At first, you might wonder how Schwab can add to a powerful lineup of dividend ETFs that are already available to investors. On one hand, iShares DJ Select Dividend (NYS: DVY) and Vanguard High Dividend Yield (NYS: VYM) all focus on giving you the highest yields possible. At the same time, Vanguard Dividend Appreciation (NYS: VIG) looks beyond the highest current yielding stocks to seek out companies with strong records of increasing payouts over time, while SPDR S&P Dividend (NYS: SDY) tries to combine both of those traits in a single stock.

What Schwab identified, however, was an opportunity for a new angle on a dividend ETF that combines the income that dividend stocks provide with a broader emphasis on capital appreciation. In order to achieve that goal, the Schwab US Dividend Equity ETF (NYS: SCHD) chooses stocks with consistent records of paying dividends as well as strong relative fundamental strength. Currently, that measure has tech giant Intel (NAS: INTC) receiving the largest weighting in the ETF, but other well-known megacap stocks like Procter & Gamble dominate the top holdings. As John Sturiale, Schwab Investment Management VP and head of proprietary investment product management, put it, "We believe in the index's methodology and think the fund will help investors diversify their income stream while limiting the potential for overconcentration in any one industry, particularly utilities and financials."

The bigger strategy
It's good to see dividend investors get another choice among ETFs. But Schwab's move also stems from competitive necessity. By adding the proprietary dividend ETF to its lineup, Schwab bolsters the attractiveness of its commission-free ETF offerings. With Fidelity having added the iShares dividend ETF to its commission-free lineup early this year and both of Vanguard's offerings having been available to its customers without a commission since Vanguard joined the broker wars last year, Schwab found itself lagging behind the dividend-investing curve.

With the move, Schwab demonstrated its commitment both to its no-commission ETF policy as well as to building a strong stable of proprietary ETFs. Although Schwab came very late to the ETF management arena and therefore gave top ETF providers like iShares, SPDR, and Vanguard a huge head start in gathering assets, the discount brokerage pioneer has done an admirable job of building up an asset base. And with both a strong retail customer base as well as good relationships providing custodial and management services to professional advisors whose clients want access to ETFs, Schwab has plenty of potential going forward to keep becoming a bigger force in the ETF industry.

Should you give it a try?
Perhaps the most intriguing thing about Schwab's new dividend ETF is its price. With annual fees of just 0.17%, the Schwab dividend ETF undercuts Vanguard's offerings by a single basis point but charges less than half what the iShares and SPDR dividend ETFs do in fees. As has happened with other niches in the ETF market, competition on cost can lead to lower fees throughout the industry -- and that's a categorically good thing no matter which ETF you end up choosing.

Picking the right ETF depends on a lot of factors, and some ETFs will do better than others when the economy finally starts firing on all cylinders. Read about three of them in the Fool's special free report "3 ETFs Set to Soar During the Recovery."

At the time this article was published Fool contributor Dan Caplinger is gonna be hungry for Reese's Peanut Butter Cups all day now. You can follow him on Twitter here. He owns shares of Vanguard Dividend Appreciation ETF. The Motley Fool owns shares of Intel. Motley Fool newsletter services have recommended buying shares of Intel and Charles Schwab, as well as creating a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy pays dividends every day.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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