In part 1, we discussed the difficulties in beating the market and started looking at ways to shape a portfolio.
To safeguard against these risks of high dividend yields tend to be a sign of trouble, it’s best to stick to broadly diversified dividend funds, where a few bad apples won’t significantly affect the portfolio. An example is the Vanguard High Dividend Yield ETF (VYM, U.S.-listed). This fund sweeps in stocks representing the higher-yielding half of the U.S. dividend-paying market.
It’s also effective to select funds that screen for both quality and yield, like Schwab U.S. Dividend Equity ETF (SCHD, U.S.-listed). This fund has a more compact portfolio than VYM, but it keeps risk in check by screening for stocks with high return on equity, dividend growth, strong cash flow/debt, and high yields. Both funds further mitigate risk by weighting their holdings by market cap, which causes stocks with weakening fundamentals to become a smaller part of these portfolios as their prices decline.
