The Sweet Spot For Dividend Stocks

Last month, I proclaimed short (but not ultra-short) maturities as the ideal place along the present fixed-income curve. Is there also an ideal target for yield-seeking stock investors?

This year has been swell for popular dividend funds. Through June 30, for example, the Schwab U.S. Dividend Equity ETF (SCHD) returned 18%, boosted by tech and drug winners. Based on its most recent quarterly distribution, the exchange-traded fund yields 2.7%, which lags utilities, energy partnerships, real estate investment trusts (REITs) and even a fourth of the names in the S&P 500. Perhaps the path to optimizing dividends is simply to concentrate on pipelines, REITs and utilities. But that leaves out a pile of possibilities.

When you benchmark stocks against 4% bank, Treasury and money market rates, 2.7% appears weak. I disagree, given that good stocks appreciate, dividends are not fixed, and the payouts are often tax-qualified, with a maximum 20% tax bite (23.8% for a few rich taxpayers). I would not chase the top of the stock-yield charts, where long-term returns can be awful.

Is there a dividend sweet spot? I set a goal of 10% total return that includes 2.5% (or more) from cash. Here's where I found possibilities:

1. A screen for qualifying companies with rising earnings and cash flow and a reasonable payout ratio.
2. Mutual funds and ETFs that filter dividend payers by a formula designed to provide high risk-adjusted returns.
3. Actively managed dividend funds.
4. A strategy of accumulating individual shares, building a substantial yield on their average cost.

The twist: Enter only at yields of 2.5% or above.

Thoughts on each:

1. Screening quality stocks for yield and return.

If you set a 10% five- or 10-year return target, plus a 2.5% yield hurdle, you lose high-yielding losers like Medtronic (MDT) but green-light an array of energy giants such as Exxon Mobil (XOM) and Chevron (CVX), big banks such as PNC Financial Services (PNC) and Fifth Third Bancorp (FITB), and some defense contractors. These embellish any collection of REITs and utilities without requiring you to spot long shots and turnarounds.

2. Gadget-type dividend funds.

The archetype is the WisdomTree U.S. High Dividend Fund (DHS), whose method is complicated but selects much of what I just described. The monthly dividends are lumpy, but you get more than 3% with low volatility; in the first half of 2026, the fund returned 13.7%.

The ALPS Sector Dividend Dogs ETF (SDOG) has a method utterly unlike that of the WisdomTree fund, but results are comparable; it is up 17% and change. The Fidelity High Dividend ETF (FDVV) is another option, albeit riskier as the ETF includes high-octane fuel such as Nvidia (NVDA) and Alphabet (GOOGL). I would be chary of any new or unproven dividend-filter ETF schemes, but this trio is worthy.

3. Active dividend funds.

Besides the Schwab ETF mentioned above, I suggest the Federated Hermes Strategic Value Dividend Fund A (SVAAX) and its more U.S.-focused ETF cousin, U.S. Strategic Dividend (FDV).

Whether purely active management outdoes the rules-based dividend screeners like those employed by ALPS and WisdomTree is an open question. But you get paid well and distributions per share often rise annually.

4. Buy, hold, collect and grow.

Normally, a dividend-growth plan centers on world-beaters such as Apple (AAPL) and Walmart (WMT) in their early years when they start to pay cash, because you can anticipate a lifetime of generous raises.

I propose a variation: Build fresh positions in 2.5%-and-up payers also known for robust dividend growth. This will be the subject of a future column. Hold the thought.

Jeff Kosnett is editor of Kiplinger Investing for Income. You can reach him at Jeff.Kosnett@futurenet.com.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Related Content

• Beyond AI: Why Our Top Dividend Stocks Remain Reliable Picks
• Best Dividend Stocks to Buy for Dependable Dividend Growth
• How to Use the Dividend Barbell Rule in Retirement With ETFs
• The Kiplinger Dividend 15: Our Favorite Dividend-Paying Stocks