Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Why Dividend ETF Turnover Costs Matter in July 2026
Transcript
- Lucas: There's a number in the dividend ETF world that almost nobody talks about, and it quietly eats into your yield every single year. I'm talking about portfolio turnover. Luna: You mean how often the fund buys and sells its holdings? I feel like most people just look at the yield and the expense ratio and call it a day. Lucas: Exactly. And those two numbers matter — don't get me wrong. But turnover is the silent sibling. Take VYM, the Vanguard High Dividend Yield ETF. It's down about 0.4 percent over the last five days, trading around $160.16 this morning. Meanwhile SCHD, the Schwab U.S. Dividend Equity ETF, is up 1.1 percent at $32.91. DVY, the iShares Select Dividend ETF, is up 0.8 percent at $161.83. Luna: Okay, so SCHD and DVY are outperforming VYM this week. Does turnover explain that? Lucas: Part of it. VYM tracks a yield-weighted index, which means it has to rebalance frequently to maintain its high-yield focus. When a stock's price drops and its yield spikes, VYM buys more — and when a stock rallies and yield compresses, it sells. That churn creates trading costs, bid-ask spreads, and potentially taxable gains for investors in taxable accounts. Luna: And SCHD, on the other hand, uses a more rules-based approach. It screens for dividend growth, quality, and financial strength, not just raw yield. Lucas: Right. SCHD's reconstitution is annual, and it only turns over about 20 to 30 percent of its portfolio in a typical year. VYM's turnover has historically been higher — sometimes over 40 percent. That difference adds up. If you assume a 0.5 percent trading cost per trade, a 40 percent turnover fund incurs an extra 0.2 percent drag annually compared to a 20 percent turnover fund. Luna: And that's before you factor in the tax hit. In a taxable account, short-term capital gains from turnover get taxed at ordinary income rates, which can be a lot higher than the qualified dividend rate. Lucas: That's the double whammy. You're paying more in taxes on gains you didn't even realize by choice — the fund manager realized them for you. Now, to be fair, VYM has a very low expense ratio — 0.06 percent. But the turnover cost can easily eclipse that, especially if you're in a high tax bracket. Luna: So what about DVY? It's up this week too. Does it have lower turnover? Lucas: DVY is a bit of a mixed bag. It tracks the Dow Jones U.S. Select Dividend Index, which weights by dividend per share. That index reconstitutes annually, but it can have significant turnover if the dividend landscape shifts. In 2025, for example, DVY turned over about 35 percent of its holdings. So it's better than VYM but not as efficient as SCHD. Luna: And in this rate environment — 10-year Treasury at 4.57 percent, 2-year at 4.16 percent — the yield curve is still relatively steep by historical standards. That's actually good for dividend stocks, but it also means investors are more yield-sensitive. A drag of 0.2 or 0.3 percent from turnover is real money. Lucas: Especially when the S&P 500 is at 7,458 and the Dow at 52,146. A lot of investors are looking for yield because growth stocks have gotten expensive. The Russell 2000 is basically flat, up 0.3 percent over five days. So the hunt for income is on, and turnover becomes a bigger deal. Luna: Let me ask you this — how can an investor quickly check the turnover of an ETF before buying? Lucas: Most ETF providers publish a portfolio turnover rate in the fund's prospectus or fact sheet. You can find it on the issuer's website. For VYM, Vanguard reports the turnover rate as of the most recent fiscal year. I'd look for a turnover rate under 30 percent for a buy and hold dividend strategy. If it's over 50 percent, you're basically paying for active trading in a passive wrapper. Luna: And there's another layer: the actual trading spread. Even if turnover is low, if the ETF trades in a thin market, the bid-ask spread can eat into your returns when you buy or sell. Lucas: Right. VYM and SCHD are both highly liquid, so spreads are tight — often a penny or two. DVY is also liquid. But there are smaller dividend ETFs out there with spreads of 10 basis points or more. That's another hidden cost. Luna: So the takeaway for our listeners: when you're comparing dividend ETFs, look beyond yield and expense ratio. Check turnover, check spreads, and think about your tax situation. Lucas: And if you're in a taxable account, consider favoring ETFs with lower turnover and a longer track record of tax efficiency. SCHD is a strong candidate. DVY can also work, but you want to be aware of the turnover risk. Luna: Honestly, if this conversation helped you think about your dividend ETF choices a bit differently, that's exactly the kind of thing that keeps us going. Lucas: Totally. And if today was worth a coffee to you, there's a link — buy me a coffee dot com slash fexingo. It's a small way to keep the show ad-free and focused on topics like this. Luna: Yeah, we appreciate the support. No pressure, just if it feels right. Lucas: So back to turnover — one other thing I want to highlight: turnover also affects how well the ETF tracks its index. High turnover can lead to tracking error, which means your return diverges from the index return. Luna: That's especially important for dividend ETFs, because the index itself is often yield-focused and can shift dramatically. If the fund is constantly trading, it might miss out on dividend payments during the holding period. Lucas: Exactly. There's a concept called 'dividend capture' that some active traders use, but for a passive ETF, you want to hold stocks through their ex-dividend dates. High turnover can cause the fund to sell right before a dividend is paid, losing that income. Luna: And of course, the fund still has to distribute the income it does receive, but if turnover causes it to miss some dividends, the yield you actually get could be lower than the stated yield. Lucas: That's a great point. So when you see a dividend ETF with a 4 percent yield, but the fund's turnover is 50 percent, you might be getting a net yield of 3.7 or 3.8 percent after costs. That 0.2 to 0.3 percent difference can compound significantly over time. Luna: And we're not even talking about the opportunity cost. If you'd held a lower-turnover ETF, your total return could be higher, even if the stated yield is slightly lower. Lucas: Let's put some numbers on that. Suppose you have $100,000 invested in a dividend ETF with a 4 percent yield and 0.5 percent annual turnover cost. Over 20 years, assuming reinvestment, that 0.5 percent drag reduces your ending balance by about 10 percent — roughly $10,000 less. Luna: That's real money. And if you're in a high tax bracket, the impact is even larger. Lucas: So what's the bottom line? If you're building a dividend portfolio, look for ETFs with turnover under 30 percent, low expense ratios, and tight spreads. SCHD and VIG are good examples. VYM is still fine for many investors, but be aware of the turnover. Luna: And if you're leaning toward high yield, consider pairing a low-turnover core ETF with a few individual dividend stocks that you can hold for decades. Lucas: That's a smart approach. Individual stocks like Coca-Cola or Johnson & Johnson — though they're down this week, KO at $81.56 and JNJ at $253.04 — they offer dividend growth and zero turnover if you buy and hold. But you need to do your homework on those companies. Luna: And if you don't have time for that, a low-turnover ETF is a great solution. Lucas: Alright, that's our take on turnover. Next time you look at a dividend ETF, check that turnover number. It might be the most important number you never noticed. Luna: And we'll be back with more insights from the Fexingo network. Thanks for listening.