This article continues discussing my investment selection process for my new TD Ameritrade Trust brokerage account. Please refer back to the previous article, “Using an ETF Screener for Investments with TD Ameritrade” to read about my plan for this account and how I set up the ETF screen.
After selecting my criteria and running the screener, I downloaded a spreadsheet with 82 ETFs that passed the screening criteria. Obviously, I am not going to invest in 82 ETFs! The next step was how I might look at this data in order to narrow it down further. FYI, I was looking at these ETFs on May 27 and 28, 2019, so numbers and prices used are from those days.
Checking Morningstar Star Ratings
I thought I had set up the ETF screener to include ETFs with Morningstar Star Ratings of 5, 4, or 3, but for some reason, there were four ETFs included on my list that had a Star Rating of 2. Maybe they were downgraded between when I first ran the screener and when I actually downloaded my spreadsheet about an hour later or maybe there was an error somewhere. Either way, I removed those first.
Adjusting Dividend (Distribution) Criteria
Since generating dividends is important to this account, I next sorted by the dividend (distribution) yield and removed all of those ETFs with yields that were less than 2.5%. Now, I had 57 ETFs to work with.
Another factor I like to consider when focusing on dividends, is figuring out how much a set amount of money invested would return on dividends for one year. This helps me to further compare which ETFs (or stocks) I would like to buy. This is not something I see anyone else doing, but I find it usually helps clarify my choices when I compare numbers instead of looking at the dividend yield percentage.
To do this, I add two columns on my spreadsheet. The first is to figure out the number of shares I could theoretically buy at the current share price with $10,000. The second is to then multiply that number of shares times the amount of cash paid out in dividends during the last 12 months. Yes, I know that the dividends may go down (or up) in the future, but I still like to extrapolate this way.
Here is an example of what this looks like. Let’s compare some of the large value ETFs: SPYD and RDIV, which both had similar prices on that day, as well as SCHV and DLN, which had different, higher prices. The math in the process is as follows, using SPYD for the example:
$10,000/Share Price = Number of shares you can buy for $10,000
$10,000/$36.93 = 270.78 shares
Then you continue to extrapolate how much you may potentially earn from dividends in the next year if everything were to hold steady and you bought at the current share price.
Number of shares you can buy for $10,000 * Previous 12 months Dividend Distribution in Cash = Potential Dividend Earnings for One Year
270.78 * $1.61 = $435.96 potential dividend earnings
Let’s see what this looks like for all four ETFs in Table 1.
When comparing the two ETFs with similar prices in the $36 range, you see that SPYD yields a larger amount of dividends by $53! It should be clear that it would be larger from the higher yield rate, however knowing a dollar amount makes it more tangible. Knowing that SPYD has a lower expense ratio of .07% versus RDIV’s ratio of .39% might push you in the direction of SPYD. However, RDIV gets a 5-star rating right now, while SPYD is at a 3-star rating from Morningstar.
As for SCHV vs DLN, DLN’s current price per share is 42% more than SCHV, but when you look at the dividend payout per year, it is slightly higher for DLN than SCHV. The expense ratio for SCHV is lower at .04%, while DLN is .28%. You have to decide what trade-off works better for you. Of course, there are other factors to consider when comparing and choosing ETFs, but this method is another way to help you narrow down your choices.
Adding Market Return
I also added a column for one year market return to my spreadsheet and began to look up each ETF individually using the resources on TD Ameritrade. I entered the one year market return percentage on the spreadsheet if it was over 8% and the return since inception was over 7%. I excluded the two REIT ETFs (USRT and FREL) from the latter qualification based on their one year returns being around 18%. I am planning on investing in them anyway as they are at the top of the dividend ETF screen and I want to invest in a couple REIT ETFs as part of the diversification of this portfolio.
Finding More ETF Info on Seeking Alpha
Now that my list is a little more manageable at 20-some ETFs, I like to read about the funds. I usually check out the Seeking Alpha website. I search for the ticker symbol and then click through the headings for Strategy, Holdings, Key Data, and Dividends, scanning the info for any red flags. I particularly like to check how many holdings are in the ETF, what the top 10 company holdings are, and what percentages are invested in each one.
If I see a larger percentage of the holdings invested in companies I don’t want to fund, that ETF gets slotted down in priority. For example, I try to avoid ETFs that invest in big tobacco companies like Altria (MO) or Philip Morris (PM) or at least make sure they are less than 2% of the fund. (I can always donate the corresponding amount of profit to anti-smoking measures.) If I don’t find anything that gives me pause, I’ll skim through recent articles that mention the ETF and also check the comments.
A Quarter of the ETFs Remain, Which Ones Will Be Eliminated Next?
I am now left with 21 ETFs from my screen, see Table 2 (you may have to zoom in to see it better). What further criteria might I look at? Which ones will I choose? Which ones would you pick?
