Build An Ultra-Low-Cost Dividend Portfolio with Just $25,000 and These 3 Stocks

For dividend investors looking to create a meaningful passive income stream either for today or in retirement, the stark reality is that there are probably too many options to consider. At least, in a thoughtful way.

Given the thousands of dividend stocks in the market (and perhaps as many dividend exchange traded funds out there), it can be near-impossible for an individual investor to digest which of the lowest-cost options are best-suited for investors who may have very different goals.

In this article, I’m going to take the perspective of an investor with a truly long-term investing time horizon. That means I’m looking at long-term dividend holdings I’d be willing to hold for the next two to three decades.

With that in mind, here’s how I’d begin constructing my dividend portfolio putting my first $25,000 in capital to work. 

Schwab U.S. Dividend Equity ETF (SCHD)

One of the top dividend ETFs I continue to come back to over the years (and am currently invested in) is the Schwab U.S. Dividend Equity ETF (SCHD). 

What I like most about this particular ETF is the very low-cost diversification SCHD provides across a range of sectors and industries. Importantly, in order for stocks to qualify for this ETF, they need to show at least 10 years of dividend payments, have a high-quality balance sheet, be profitable, and be consistent in their delivery of dividends over time.

This means that no average stock can make this fund. And with such strict criteria, a relatively low turnover ratio helps this ETF maintain its rock-bottom expense ratio of 0.06%. That’s what investors pay for the ETF’s 4% dividend yield (with dividend growth potential) this ETF provides.

That’s the kind of growth I’m looking for. And with average annual returns of around 15% when factoring in capital appreciation and dividends in recent years, this is the sort of ETF that provides the total return picture most investors are after right now. 

Fortis (FTS)

One of the only ways to get cheaper exposure to dividend stocks is to buy them individually. Of course, assigning a portfolio weighting to an individual dividend stock requires significant trust that not only will that company be there in two or three decades (competition and other factors lead many firms to be pushed out of their core markets or pushed aside by investors), but also pay the same or higher dividend yield down the road.

Fortis (NYSE:FTS) is a Canada-based utility giant I think has the potential to do both. On the dividend growth front, Fortis really stands out from most of its peers due to the company’s 51-year dividend growth trajectory.

Companies in this same position as Fortis are loath to cut or remove such a dividend, as this distribution becomes the key factor many investors use to value the stock. There’s an annual dividend increase implicitly priced into this stock. Accordingly, when Fortis raises its dividend each year, investors reassess where the stock trades relative to its distribution (what Fortis’ yield current sits at) to determine how over or undervalued this stock is at a given point in time.

Right now, Fortis’ dividend yield sits at 3.8%, but investors can expect this yield to move considerably higher over time, as Fortis continues to pass on its regulated increases to investors. The company has continued to increase its dividend around 6% or so each and every year, which means the distribution investors receive today should roughly double ever dozen years or so. That’s an investing thesis I can get behind. 

Vanguard Dividend Appreciation ETF (VIG)

Sticking with this dividend growth theme, the Vanguard Dividend Appreciation ETF (VIG) is the top way I think investors can gain exposure to such high-quality stocks as Fortis, with impressively low-cost diversification across so many companies.

Currently boasting an expense ratio of just 0.05%, the VIG ETF is among the lowest-cost options on this list. However, this ETF “only” provides a dividend of 1.8%. That’s still roughly 50% higher than what owning an S&P 500 index ETF will provide, but it’s a far cry from SCHD and other dividend ETFs right now.

That said, this ETF’s focus on dividend aristocrats leads to its lower yield, but also ensures relative stability when factoring in how interest rates can move over time. If you’re among the investors out there that are worried bond yields could actually rise over time (and hurt dividend stocks in such ETFs), this would be my primary option.