$1M Portfolio: SCHD or Dividend Kings for Income?

Welcome to the Simply Safe Dividends channel, I'm Brian Bollinger. I built two dividend portfolios with a million dollars each. One with SCHD, the most popular dividend ETF, and one with All The Dividend Kings, which are a group of 55 stocks that have raised their dividends for 50 plus straight years. I want them to know which approach makes for a better retirement portfolio, so in this video I'm going to analyze and compare SCHD and The Dividend Kings to see which offers a better overall combination of current income, dividend safety, dividend growth, total returns, and volatility. I'll be using our website Simply Safe Dividends to compare these two portfolios that I built. If you would like to try out our website to review your own portfolio or research stocks, I'll leave a link in the description below to our free trial. There's no credit card required or anything like that. All right, here's our portfolio of Dividend Kings. We have a one million dollar balance and I spread that across all 55 Dividend Kings. They each get about a 2% weight in this portfolio. Now Dividend Kings are a popular group of stocks because they've paid safe and rising dividends every year for at least 50 straight years, some as long as 70 years in the case of this water utility. So a dividend is not guaranteed, but these companies have made it through many market and economic environments with their payouts not only intact, but also growing, making them pretty popular with income investors. It's a pretty diverse set of companies here. We have everything from Lowe's to companies like Coke and Johnson & Johnson. A lot of smaller companies are Dividend Kings as well. We have a few that are under a billion dollar market cap here. Some yield as high as 4, 5, 6%, others yield less than 1%. So again, this is a very diverse group of 55 Dividend Kings. And from a current income perspective, they're paying a dividend yield overall of 2.8%. That's good for annual income of $28,000 out of the gate. Now, one of the benefits of putting together a portfolio of individual stocks instead of funds is that their payouts are very predictable. They declare a dividend, they tell you the exact amount and when it's going to be paid. There's no surprises and these companies typically pay on the same schedules throughout the year. So it's a very good bet, for example, that a company like Johnson & Johnson is going to pay in June, September, December, and March every year. And we know the number of shares we own, the dividend that they're going to pay based on their current payout rate. And we can forecast our income and we add it all up and get this schedule. So compared to an ETF like SDHD, this is a more predictable approach. ETFs are rebalancing over time. Their dividends kind of move up and down unpredictably from one quarter to the next. So the income is still solid. But just a little less predictable. All right, let's compare the Dividend King's income, that $28,000, to the income from a portfolio of SDHD. Now, instead of just putting in the ETF, I actually went ahead and pulled in all of the underlying holdings that are in SDHD. They have different weights. And this will give us a look under the hood, essentially, to see the underlying growth rates, income, all of that stuff from SDHD's holdings. If you're not familiar with SDHD, it's Schwab's U.S. Dividend Equity ETF. I think it's the most popular dividend ETF out there. Very low expense ratio, just 0.06%. Tracks the Dow Jones U.S. Dividend 100 Index. It's a benchmark that is looking for the highest yielding stocks, but it applies a number of quality measures or filters, rather. Things looking for like low cash flow to debt ratios, high profitability, fast dividend growth. Paying a dividend for at least 10 years. So that's how this portfolio gets put together. Holds 100 stocks, and we can see that this results right now in a much higher dividend yield than the Dividend King's. A 4% yield, essentially, about $40,000 of annual income coming in from SDHD in the year ahead. So SDHD wins that first comparison in the current income battle between these two portfolios. Now, what about dividend growth? Well, SDHD is the underlying holdings here. You can see they've compounded their dividends by about 6% to 7% per year, but that rate is slowing down. This year, these holdings are growing their dividends by about 4%. However, what SDHD does each year, it reconstitutes this portfolio. So it kicks out companies that now have a lower yield or weaker fundamental metrics, and it buys companies that rate higher across those factors that it looks for. And by doing this type of rebalancing, kind of selling off your lower yielders and replacing them with higher yielders, that has helped SDHD compound its income faster than what's in the portfolio today. You can see the dividend has grown at a consistent double-digit pace over the last decade, and over the last 12 months, it's even up about 17%. Now, how does that compare to the Dividend King's? If I flip back over to that portfolio, we can see that the growth rate has been lower across the board, really, and also slowing down. So over the last decade, these Dividend Kings, again, we're looking at all of the 55 companies in this portfolio and how much income they've contributed each year and how it's grown. About 5% per year over the last decade, but it's slowing down to under 4% this year. And unlike SDHD, there's no rebalancing effect here. We're just owning these companies outright. So I don't really expect there to be any sort of boost to this profile here. I think probably baking in about a 4% to 5% dividend growth rate is reasonable for the Kings, which could be less than half of SDHDs, or at least comparable. So from a dividend growth perspective, I'm going to give SDHD the edge here with both how the fund, the current holdings in the fund, and also how it rebalances to boost that growth figure. Keeping your income safe is a top priority in retirement. So we'll now compare these two portfolios from a dividend safety perspective using our dividend safety scores. If you're unfamiliar, these range from zero to 100, and they're forecasting how safe a company's dividend looks over a full economic cycle, including a recession, taking a long-term perspective to avoid whipsawing investors and to kind of be prepared for a bad scenario to play out whenever that does happen. Now, we're the only company I'm aware of that maintains a real-time track record showing you all 882 dividend cuts we've seen since we started doing this in 2015. Now, we show you what the company's dividend safety score was right before the cut was announced to show their predicted value. The bottom line is, if you stuck with companies that maintained a safe or very safe dividend safety score, you would have avoided at least 97% of these cuts that occurred. So using these safety scores, we can open up each portfolio's dividend safety report to see the breakout of their income. So looking at the Dividend Kings first, we can see that 92% of the dividends this portfolio was generating comes from companies with a safe or very safe rating. That's a really healthy mix there, and these dividends are not guaranteed, but they're a pretty darn good bet to continue in good times and bad. There's only two Dividend Kings that have a borderline safe dividend safety score, Universal and Altria. I don't have any near-term concerns about their dividends, but I do think they face some longer-term question marks with adapting their business as traditional cigarettes see lower demand in the years ahead. SCHD's Dividend Safety Pie Chart is a little messier and a little lower quality than the one we just saw with the Dividend Kings. About 65% of the income is coming from companies with safe or very safe dividend safety scores, but about 30% is coming from borderline safe rated payers, and 4% of the income is coming from companies that could be at risk of cutting their dividends, including some businesses like FMC, Whirlpool, Western Union, that are facing various challenges. So head-to-head, the Dividend Kings portfolio looks better from a dividend safety perspective, but it's important to remember that SCHD does go through that annual reconstitution where it kicks out weaker companies, but also replaces a lot of lower-yielding stocks with higher-yielding stocks, which lifts the income, and that has been key to helping SCHD pay rising dividends every year since it was launched, and that to me makes it a little more comfortable to look past just this safety score pie chart because these holdings could change a lot just under a year from now. But overall, I'm gonna give the Dividend Kings portfolio a slight edge from a dividend safety perspective. Last but not least, we'll take a look at the long-term returns and volatility of these strategies. So I went ahead and charted back to 2014 if you had put $10,000 in the Dividend Kings, SCHD, and the S&P 500 and reinvested those dividends, what would have happened? This is not survivorship bias or anything. I used the actual Dividend Kings that existed at the start of each of these years and rebalanced the portfolio to keep it equal weighted each year. You can see up until the pandemic, these three strategies were pretty much neck and neck, but post-pandemic, we've been living in a world dominated by growth and momentum stocks, especially big tech, which has driven the S&P 500 at a really incredible pace. SCHD really had one year where it significantly outperformed the Dividend Kings in 2021. It had rotated into a lot of financial companies, energy stocks around this time, cyclicals that really took off once it was clear that the economy was going to be okay and everything was kind of reopening. Otherwise, since that point in time, SCHD and the Dividend Kings have been pretty similar, but that year still counts, and that's helped SCHD deliver a 10.7% annual return since 2014, which is better than the 8.7% recorded by the Dividend Kings, but no one is really close to touching the S&P's nearly 13% annualized return, which is well above its own historical norm too. Again, mostly driven by big tech, large cap growth names. So from a total return perspective, we can give SCHD the win here on a historical basis, but going forward, I would be kind of surprised if there was a huge difference between these two. SCHD is going to be a little bit, slightly more aggressive than the Dividend Kings, which consists mostly of consumer staples, healthcare, utility stocks, these defensive stalwarts. From that perspective, when we talk about volatility, both SCHD and the Dividend Kings have been less volatile than the S&P 500. A good example on this chart here is the year 2022. The S&P 500 was down, I think about 20% almost. You can see a dip in the red line, but SCHD and the Dividend Kings were down far less. And I think that's a pattern I would expect to see hold true again if any steam does come out of the market. Now, head to head, if you crunch the numbers and actually run the volatility or how much these returns have varied year to year, the Dividend Kings are a little bit less volatile than SCHD. So I'm gonna give the Dividend Kings the overall win in the volatility column here, but both SCHD and the Kings, I would expect to do better than the S&P 500 in the event of a big downturn in the market. Putting it all together, I think SCHD looks like the more attractive retirement portfolio overall. A big consideration is just more current income out of the gate, about $40,000 for SCHD versus closer to 28,000 for the Dividend Kings. SCHD's income doesn't quite look as safe as the Kings, but with the fund reconstituting its holdings each year to focus on quality companies with good fundamentals and kicking out the lowest yielding stocks in favor of those with higher yields, that kind of overcomes that weaker pie chart and has helped the fund deliver faster dividend growth, historically speaking, which I think will continue over the Dividend Kings. They're mostly made up of staples, utilities, healthcare companies that are inherently slower growing businesses. SCHD also has the stronger long-term returns. Again, it's kind of hard to say which of these two groups will win out going forward, but I do like that SCHD's rules essentially look for quality companies that are offering a high dividend yield, kind of trying to find those good businesses that are temporarily out of favor. Dividend Kings, I would expect to be less volatile going forward though. So Kings are a little bit more defensive, less current income, but time-tested businesses. SCHD just has a really good approach that's quite frankly hard to beat over the long run at the expense ratio of the fund charges. But the great thing about being a dividend investor is you can kind of come up with any portfolio to meet your own needs. Maybe you want to try for higher income or faster growth or a better safety profile. All those things are possible with putting together a mix of stocks and funds. So I hope this video was helpful as you consider these two popular groups of stocks. I appreciate you watching and I hope to catch you next time.