DIVO vs SCHD: One is a better dividend ETF

The Amplify Enhanced Dividend (DIVO) and Schwab US Dividend Equity ETF (SCHD) are popular ETFs among retirees and income-focused investors. The two have a dividend yield of 4.74% and 3.63%, respectively, higher than that of SPY and QQQ. This article will look at DIVO and SCHD and explain why one is a better buy.

DIVO vs SCHD

DIVO is a unique ETF that holds just a handful of dividend-paying companies that have a track record of growing their payouts. It is a highly consolidated fund with just 32 companies. A key feature is that part of its ETF is made up of covered calls. 

As I wrote in this article on JEPI, covered calls buy an asset and then hedges with a call option. A call option is a contract that lets a person buy a stock at a certain price until a defined expiration date. 

In most periods, covered call ETFs outperform the market when stocks are falling or moving sideways. This explains why the DIVO ETF outperformed the broad market in 2022. 

DIVO differs from other covered call ETFs like JEPI and JEPQ in that only a small portion of its portfolio is covered. The rest of its portfolio is fully exposed to market moves. The biggest companies in DIVO are Microsoft, Visa, P&G, McDonalds, and Johnson & Johnson among others.

DIVO also has other features. It is made up of big companies that grow their dividends and is balanced across all sectors in the S&P. 

SCHD, on the other hand, is an ETF that tracks slightly over 100 companies that have a long track record of dividend growth. The fund, which has over $47 billion in assets, is significantly cheaper than DIVO with its expense ratio of 0.06%. However, it has a lower dividend yield of just 3.63%. The biggest holdings in the SCHD ETF are Cisco, UPS, PepsiCo, Coca-Cola, and Verizon among others.

SCHD vs DIVO: better buy?

So, which is the better buy between SCHD and DIVO?  First, let us look at the historical returns. A $10,000 invested in SCHD on January 1st 2016 would now be worth over $23,842. In the same period, the same amount invested in DIVO would be worth $19,979. Therefore, in terms of returns, as shown below, the SCHD ETF tends to outperform DIVO.

DIVO vs SCHD ETFs

SCHD has two other benefits as well. As mentioned above, it has a lower expense ratio than DIVO. A $100k invested in the fund generates just $60 in annual fee. In the same period, an investment in DIVO would have about $550 in fees. These are significant numbers, especially for a retiree hoping to make a regular income from the fund. 

Second, there are risks of embracing covered call strategy in a period when stocks are in a bull market. Further, it has a long history of dividend growth. In the past five years, its CAGR dividend growth rate was 13.9%, higher than DIVO’s 5.31%. Therefore, I believe that SCHD is a simple-to-understand ETF that is better than DIVO.