Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Stock Selection Beats Blind ETF Buying in 2026
Transcript
- Lucas: If you look at the major dividend ETFs over the past five trading days, you see a pretty clear divergence. VYM, Vanguard's High Dividend Yield ETF, is up about 0.2%. SCHD, Schwab's US Dividend Equity ETF, is up 1.5%. DVY, the iShares Select Dividend ETF, is up 0.8%. That's not noise—that's a real gap driven by what these funds actually own. Luna: So the ETF that tracks the highest-yielding stocks is actually lagging the one that's more quality-focused. That's interesting because a lot of people just buy whichever has the highest yield and assume they're getting the same thing. Lucas: Exactly. And it ties into a broader question that's been on my mind: Are you better off buying a dividend ETF blind, or should you be picking individual dividend stocks? The data this week suggests the answer might be a mix of both. Luna: Before we dive into that—and this is totally off-topic but I think it matters—there's a reason we can spend time digging into these ETF holdings rather than rushing through a script. A handful of listeners chip in monthly at buy me a coffee dot com slash fexingo, and that's what keeps this show ad-free. Lucas: Yeah, it's a small group, but it makes a huge difference. It means we don't have to chase ad reads or sponsors that don't fit. So if you've gotten value from these conversations, that's the way to keep them coming. Luna: Alright, back to the divergence. Lucas, walk me through why SCHD has outperformed VYM this week. What's in each fund? Lucas: Sure. VYM is yield-first. It tracks the FTSE High Dividend Yield Index, which basically screens for stocks with above-average dividend yields. That means it's heavy on utilities, consumer staples, and energy—sectors that tend to have high yields right now. SCHD, on the other hand, uses a multi-factor screen: it looks for dividend yield, but also dividend growth, payout ratio sustainability, and return on equity. Luna: So SCHD is more selective. It's not just grabbing the highest yield—it's trying to find companies that can keep raising their dividends. Lucas: Right. And that has led SCHD to overweight financials and healthcare relative to VYM. Those sectors have done well this week. The ten-year Treasury yield ticked up from 4.55 percent to 4.60 percent, which typically helps financials. Meanwhile, VYM's big energy holdings have been under pressure with the S&P 500 down 0.8 percent. Luna: Let's look at two individual stocks that illustrate this. Johnson & Johnson is up 1.5 percent this week. Verizon is up 2.2 percent. Both are dividend stalwarts, but they're in different ETFs. Lucas: JNJ is a top ten holding in both VYM and SCHD, but it carries a much heavier weight in SCHD. Verizon is also in both, but it's a bigger position in VYM. So when Verizon outperforms, VYM gets a bigger boost. But when JNJ outperforms, SCHD gets the edge. Luna: And this week, it's Johnson & Johnson and Verizon both up, but JNJ's gain is more consistent with the broader market. Verizon's pop might be sector-specific—maybe 5G capex news or something. Lucas: That's the thing. Verizon's dividend yield is around 6.8 percent, which is incredibly high. But that yield is also a signal: it suggests the market is pricing in some risk. Verizon has massive debt from its spectrum and 5G investments. Its dividend payout ratio is over 50 percent of earnings, which is fine, but free cash flow coverage is tighter. Luna: So a high yield can be a trap if the company can't sustain it. That's where the active selection comes in. Lucas: Exactly. If you just bought VYM because it had a 2.9 percent yield versus SCHD's 3.3 percent—wait, actually SCHD's yield is lower, around 3.2 percent. But VYM's yield is a bit higher, around 3.5 percent. So VYM looks more attractive on yield alone. But this week, SCHD has delivered better total return. Luna: And that's the argument for picking individual stocks. If you can identify the Verizon-like traps and the jnj like compounders, you can build a portfolio that does better than the ETF. Lucas: But it's hard. Very few people have the time or skill to do that consistently. That's why I actually think the smartest approach is a hybrid: own a core dividend ETF like SCHD, but then overlay a few individual positions where you have high conviction. For example, if you believe in Johnson & Johnson's pipeline and its dividend growth record, you can add more on top of what the ETF gives you. Luna: Or if you think Altria's yield is safe despite regulatory headwinds—MO is up 3.5 percent this week—you might want a bigger position than the ETF allocates. Lucas: Right. But you have to be careful. Altria's yield is over 8 percent. That's a red flag for many analysts. The market is essentially saying there's a high probability of a dividend cut. So if you overweight it, you're making a bet that the market is wrong. Luna: Let's zoom out. The 10-year Treasury yield is at 4.60 percent, the 2-year at 4.21 percent. The spread is 37 basis points. That's a steepening curve, which historically has been good for dividend stocks because it signals economic growth. But it also means bonds are more competitive. Lucas: That's the key tension right now. With a 4.6 percent risk-free rate, a dividend stock yielding 3.5 percent doesn't look great unless you believe the dividend will grow. That's why dividend growth stocks like JNJ and SCHD's top holdings have been rewarded. They offer a growing income stream that can outpace inflation and eventually surpass the bond yield. Luna: So the ETF that emphasizes dividend growth—SCHD—is better suited for this environment than the one that just chases yield. Lucas: I think so. And the performance gap this week is a microcosm of that. But there's another layer: DVY, the iShares Select Dividend ETF, uses a different methodology. It picks the top 100 stocks by dividend yield from a universe of the highest-yielding stocks, but then applies a quality screen like earnings growth. That's why it's up 0.8 percent—somewhere in between. Luna: What about Realty Income? It's a REIT, so it's in a different category, but it's up 2.7 percent this week. That's a big move. Lucas: Realty Income is interesting because it's a triple net lease REIT with a strong track record of dividend increases. Its yield is around 5.5 percent. That's attractive relative to bonds, especially if you think interest rates aren't going much higher. The Fed funds rate is flat at 3.63 percent, and the market seems to think the Fed is done hiking. Luna: So for a dividend investor, the case for picking individual REITs or dividend stocks is that you can target specific yield and growth profiles. An ETF gives you diversification but you might miss out on idiosyncratic opportunities. Lucas: Exactly. And the flip side is that if you pick wrong, you can get crushed. Take a company like Walgreens—it was a dividend aristocrat until it cut its dividend in 2024. Anyone who overweighted it in their portfolio took a big hit. Luna: So the hybrid approach seems prudent. Let's say someone has a $100,000 dividend portfolio. What would you suggest? Lucas: I'd put 70 percent into a dividend growth ETF like SCHD. That gives you broad exposure and automatic rebalancing. Then take the other 30 percent and pick 5 to 10 individual stocks where you have a strong thesis. Johnson & Johnson, Microsoft, Apple—though Apple's yield is only 0.5 percent—maybe a REIT like Realty Income, and a utility like NextEra Energy. Luna: And then you can tilt the individual picks based on your view. If you think the yield curve is going to keep steepening, you might overweight financials. If you're worried about a recession, you might overweight healthcare and staples. Lucas: Right. And the ETF provides the baseline. It ensures you're not making a huge mistake if your individual picks underperform. That's the best of both worlds. Luna: One thing I want to flag: the S&P 500 is down 0.8 percent this week, the Dow is down 0.8 percent, and the NASDAQ is down 1.6 percent. So dividend stocks as a group have held up relatively well. That's the defensive characteristic investors love. Lucas: Absolutely. In a down week for the broader market, dividend ETFs are flat to slightly positive. That's the whole point: income provides a cushion. But within that, there's a lot of variation. The key takeaway for me is that you can't just buy the highest yield and call it a day. You have to understand what you own. Luna: And if you don't have the time or desire to pick stocks, at least choose the right ETF. SCHD vs VYM vs DVY—they're not interchangeable. Lucas: Exactly. Look under the hood. Check the top ten holdings. Look at the sector weights. Then decide which one fits your view on the economy and interest rates. That's a conversation we can have another time. Luna: For now, I think the message is clear: passive doesn't mean thoughtless. Even if you're buying an ETF, you should know why. Lucas: Well said. That's all for this episode of Dividend Investing with Fexingo. We'll be back tomorrow with another angle.