Ep. 133: Quality Beats Yield — How the 'Boring' Dividend Funds Won 2026 on Total Return (SCHD, HDV, VYM vs SPY; SCHD vs SPYI; JNJ & LIN; Colgate)

When you picture the ultimate winning investment of 2026,
you probably picture glowing AI chips, right?
Absolutely. AI chips, massive server farms.
Maybe CEO and a leather jacket.
You definitely don't picture generic dish soap and old school industrial gas.
No, definitely not.
But we've spent the week pouring over all this historical market data,
Q3 earnings estimates and some really fantastic YouTube financial breakdowns.
And we found this massive contradiction.
Yeah, the boring stuff is quietly crushing the flashy stuff.
Exactly. Welcome to the deep dive.
Today we are looking at why total return and, well, underlying quality consistently
beat headline yield and why the market rotation of 2026 caught so many people
looking just completely the wrong way.
It's the classic trap, honestly, you know, buying a narrative instead of buying a real
business. Right.
If you're listening to this and you're looking at your own portfolio right now,
you might be holding funds that you think are doing one thing while underneath the
hood, um, the mechanics are doing something entirely different.
So let's just roll out the hard numbers because the 2026 proof is, I mean,
it's staggering. It really is.
Everyone has been obsessing over big tech or hunting for the absolute highest
dividend yields they can find.
But this group of incredibly unglamorous dividend ETFs ended up trouncing the
S&P 500 trouncing it. Right.
Let's set the baseline here.
The S&P 500 tracked by SPY was up 13% year to date.
Yeah, solid year.
Yeah, very solid.
But look at these dividend funds over the past year.
SCHD is up 30.05%.
HDV is up 24.5%.
VYM is up 23.96%.
Wow.
And even DVY, which we will unpack later is up 18.22%.
The contradiction at the heart of those numbers is what makes this whole thing so
fascinating.
How so?
Well, every single one of those dividend funds you just listed pays less
in current income than a standard risk free treasury bond right now.
Right.
So a lot of investors see that and they think, well, why would I buy a stock fun
yielding maybe 3% when I can get a treasury yielding around 5%.
Yeah.
I mean, it seems like basic math.
Right.
But the critical lesson for 2026 is that paying less than a treasury clearly
did not mean returning less exactly, which actually that brings up an important
point before we get too deep into the weeds here.
I want to explicitly state that this deep dive is strictly for educational purposes.
Always good to clarify.
Yeah.
We are examining the data and breaking down the financial mechanisms behind these
returns.
We are, you know, not giving financial advice.
Right.
We're really just aiming for exposure awareness here because so many investors,
they just click a button in their 401k and assume they're covered.
Oh, absolutely.
Without actually understanding the machinery, they just bought.
Okay.
So let's unpack this machinery because
to understand how these dividend funds won so big, we first have to understand
what they were competing against.
We have to look at the defaults.
Right.
We need to look inside the, quote, unquote, safe index funds that most people just
default into.
If you hold a fund like VO or SPY, which tracks the S&P 500 or VTI, which is the
total market, I mean, it sounds incredibly safe.
Right.
The branding is great.
S&P 500 means 500 companies.
That sounds like the very definition of being spread out and diversified.
It sounds like it sure until you actually look at how the index is constructed.
Okay.
Break that down for us.
The S&P 500 is cap weighted and we need to explain that mechanism because it
literally dictates everything.
Cap weighted means the larger a company's market capitalization grows, the more
weight it carries in the index.
So it's not an equal split, not at all.
As a stock goes up in price, the index automatically buys more of it.
It's basically an autopilot system that constantly concentrates your money into
whatever has already won.
Meaning if a handful of companies have just this unbelievable run, your 500 company
index suddenly becomes a massive bet on just a few names.
Yeah, exactly.
And that is the reality of VOO right now.
It trades at over $700 a share holding over a trillion dollars in assets.
It's the default fund for American retirement, right?
But roughly 36% of the funds entire weight is concentrated in just eight stocks.
Just eight, the big tech eight.
Yeah.
So we're talking Nvidia, Microsoft, Apple, Amazon, Meta, Alphabet, Broadcom and Tesla.
Exactly those eight.
And if you look at the NASDAQ 100, which is tracked by QQQ, it is even more extreme.
That fund is 40.3% concentrated in those exact same eight names.
It's massive concentration.
So okay, owning the S&P 500 right now, it's kind of like being on a 500 person cruise ship.
But just eight guys down in the engine room are steering the entire vessel.
That is a perfect analogy.
You think you're traveling with a massive crew, but your destination is entirely up to them.
But okay, I have to push back here for a second.
Sure.
Isn't that 36% concentration just, you know, the cost of getting pure AI exposure?
I mean, if AI is the future of the global economy, shouldn't you want a third of your portfolio writing on it?
I hear that argument all the time.
I really do.
But the data tells a very different story.
Really?
Yeah.
The big tech eight is a mega cap tech basket.
It is not a pure AI basket.
Those two things get conflated constantly.
Well, look at Apple for a long time.
The market viewed them as an AI laggard, right?
Yeah.
They're highly dependent on hardware sales cycles or look at Tesla despite all the robotics narrative.
Fundamentally, their current cash flow makes them an auto maker dealing with margin compression.
I see.
So lumping all 36% under AI is basically just marketing.
It's a massive overstatement.
If an investor specifically wants pure AI semiconductor exposure like the company's
actually making the chips and infrastructure and video Broadcom Micron AMD,
that slice only makes up about 13% of V.O.
One just 13 right.
So the retail investor who is terrified of missing out on AI actually owns
significantly less pure AI than that massive 36% headline implies while
taking on all the concentration risk of the non AI mega caps.
Exactly.
Which makes a performance of SCHD this year absolutely wild.
Oh, it's incredible because SDHD won the one year total return battle.
A roughly 30% and it's methodology screens for dividend quality and yield.
Yes.
And because most of the big tech eight pay little to no dividends.
The screening process just naturally filtered them out.
SCHD holds exactly 0% of those eight stocks.
It completely missed the AI mega cap hype train.
And it's still beat the S&P 500 and not only did it beat the index,
but having 0% concentration in the big tech eight gave investors a much,
much smoother psychological right.
Right.
Less volatility.
Yeah, we measure this using maximum drawdown and the sharp ratio.
SCHD had a maximum drawdown, meaning the biggest drop from its absolute peak
to its trough of just negative 4.6%.
OK.
Meanwhile, V.O.O dropped negative 8.9% during its worst stretch.
And the sharp ratio basically measures like how much anxiety you have to suffer
to get your returns right?
Yeah, that is a great way to put it.
The sharp ratio calculates your return per unit of risk or volatility.
SCHD had a sharp ratio of about 2.9 or as V.O.O was sitting way down at 1.7.
OK.
So you got significantly more return for every bump in the road you had to endure.
Exactly.
But wait, if you're not writing a video in Microsoft to a 30% game,
how on earth did SCHD do it?
Like what is underneath the hood if it's not the big tech eight?
This is where we have to separate the dividend from the business itself.
It wasn't the dividend payout powering those returns.
It was the underlying sector composition.
So what were they holding?
SCHD's 30% jump was driven by non-megacap tech and semi-conductors.
So it holds names like Qualcomm, which makes up about 6.74% of the fund and Texas
instruments at 5.9%.
OK.
And it also leaned heavily into healthcare with united health at over 5%.
Yeah, I was looking at that exact holdings list and it almost looks like
cheap growth wearing a dividend jersey.
That's a good way to look at it.
Like it found the tech companies that actually make real money and pay yield
rather than the ones trading on pure future speculation.
Right, the established players, but what really blows my mind is that you can
look at another fund right next to it, HDV, which is up nearly 25% and it got
there using a completely opposite playbook entirely opposite.
HDV is heavily energy inflected.
It holds roughly 15% in just two old school oil majors, Exxon and Chevron.
Just massive oil positions.
Yeah.
And what you saw with HDV was the fund essentially monetizing a massive
macroeconomic shift.
We had this spike where crude oil jumped 17% in a single month to nearly
$85 a barrel.
Wow.
And HDV captured that directly.
And then VYM up almost 24% they just cast a massive net.
I think it has over 500 holdings capturing broad comment around 8% and JP Morgan
at over 3% you just kind of absorbed the broader strength in energy,
financials and tech.
Yeah, a much broader approach.
But we need to talk about the laggard of the group.
DVY was a 18.22% and here's where it gets really interesting.
Yeah, the DVY story is crucial.
Because if DVY has the highest headline distribution of the group,
we're talking over $5.25 a share over the trailing 12 months.
Why did it finish last among the four on total return to understand DVY?
You really have to understand the concept of duration sensitive equities.
OK, what does that mean?
Well, DVY is packed with utility companies and regional banks.
And let's explain the mechanism of a utility stock in a high interest rate environment.
Utility companies generally have very low growth,
but they pay a very steady, reliable dividend.
For years, investors treated them almost like bond surrogates.
Because I mean, when interest rates were near zero,
getting a 4% yield from a utility company looked amazing.
Exactly.
But well, consider what happens when rates go up.
Suddenly, a risk-free treasury bond is yielding around 5%.
Right.
If you're an investor, why would you take on stock market risk to get a 4% yield
from a utility company when you can just get a guaranteed 5% from the US government?
You wouldn't.
It makes no sense.
You wouldn't.
So the utility stock's price has to drop.
And as the stock price drops,
it's dividend yield mathematically rises until it becomes competitive again with that
treasury.
That downward pressure on the stock price is why DVY struggled to keep up with funds
holding tech and oil.
That makes total sense.
The yield looks great on paper,
but the underlying stock price is just getting hammered by the macro environment.
And this actually brings up a piece of crucial nuance we really have to address.
If you're listening to this and thinking, you know, you should dump your S&P 500 fund
for SHD tomorrow, we need to zoom out of it.
Yes, we do.
Because over a five year window, both SHD and DVY actually trail the S&P 500.
That is such a vital point.
For years, sitting out that mega cap tech run was a meaningful drag on a portfolio.
The structural feature we talked about earlier, that extreme concentration in cap weighted
indexes, it's a massive tailwind in a tech bull market.
Right.
It pushes the winners up, but it's a severe headwind when the market rotates.
So this is a 2026 rotation story.
It is not a permanent forever victory over index funds.
We also need to be clear about the income side of the equation because if your goal is
purely maximizing current income after taxes to pay your bills right now,
those 5% treasuries we keep mentioning actually still win.
They do.
And that's because the tax mechanics treasury interests generally escape state and
local income taxes is huge in some places.
Oh, absolutely.
Qualified dividends from ETFs like SHD or VYM, they do not escape those taxes.
So depending on what state you live in, the tax drag on those dividends can be
really substantial, right?
Total return builds wealth over decades, but for immediate tax efficient cash flow,
treasuries remain incredibly hard to beat.
Okay, so since we've firmly established that total return and the underlying
sector composition are what actually drive long term wealth, let's directly
compare a modest, growing yield against a massive flat sticker yield.
So let's do it because this is the classic dilemma for long term investors.
You look at SHD with a mere 3% yield.
Why would you buy that when you could buy an income ETF like SBYI,
yielding around 12% or a covered call fund like JEPQ offering nearly 11%.
It is the single most common psychological trap in retail investing.
People see a 12% yield and they just assume it's a guaranteed fast track path to
well, right?
They just see the 12 and click buy, but they don't look at the mechanism
generating that yield or what happens to it over time.
So what does this actually mean for the listener?
Let's look at it like your career.
Choosing a fund like SBYI is like taking a high paying hourly job where your
boss explicitly tells you that you will never ever get a raise.
Ooh, like that taking SHD is taking a lower starting salary,
but getting a guaranteed 11% raise every single year.
That analogy perfectly captures the math of dividend growth.
Historically, SHD has an 11% dividend growth rate.
The companies inside the fund are constantly raising their payouts.
Yeah, let's look at how that actually compounds.
If you invested $70,000 initially and contributed $2,500 monthly over 30 years,
that compounding dividend growth results in a portfolio worth roughly $2.7 million.
Wow.
That is the power of getting a raise every year, just snowball.
It really does.
Now look at SBYI, it is a very effective ETF for its specific purpose,
but it offers a flat distribution.
It's about 52 cents per share per month.
Okay.
That is fantastic.
If you are retired today and you need immediate income to paper groceries,
but there is no underlying dividend growth.
So over 30 years horizon, inflation is quietly eating your fixed
52 cents.
You're purchasing power slowly, invisibly roads.
And then there's GEPQ, right, which yields around 11%.
It brings its own specific set of warnings.
I look at GEPQ's stock price chart, and it looks super stable.
Like it just bounces in a really tight band all year while paying out these huge
distributions.
Well, a compressed price band alongside a massive distribution and a covered
call fund is not a sign of calm.
No, no, it is the signature of NAV erosion.
Net asset value erosion.
We have to explain how covered calls actually work to understand why this is
dangerous for long-term growth.
Okay.
Yeah.
Walk us through that mechanism.
How does GEPQ generate that 11% when a fund like GEPQ sells a covered
call, they are literally selling the rights to their stocks future upside
in exchange for cash today.
They take that cash and they hand it to you as a dividend.
But consider what happens when the market goes on a massive run.
The underlying stocks go up, but GEPQ doesn't get to capture that full gain
because they already sold the rights to it.
Wow.
So you ate the downside risk of being in the stock market, but you sold away
the upside.
That is the heavy and visible cost of an 11% yield and the data proves it.
Over the trailing year, GEPQ's total return was about 19.4%.
Which I mean, that sounds great on paper.
It does until you look at the underlying index at tracks, the NASDAQ 100 or
QPQ, QQ, QQ returned 24.1%.
Oh, wow.
By chasing the immediate income, you structurally capped your upside and
you gave away nearly 5% of potential wealth.
This is exactly why total return is the only metric that shows the whole
truth.
If you only look at the yield, you're quite literally only looking at half the
math precisely.
And we can actually see this principle of quality over headline yield,
perfectly embodied not just in ETS, but in individual elite quality companies
that the broader market just completely ignored during the tech run.
Oh, absolutely.
Let's look at the dividend aristocrats.
These are companies that have increased their dividends for 25 plus consecutive
years. They're the ultimate compounding machines.
Right. And Wall Street analysts are rating some of these as strong buys right
now. I had a Q3 2026 earnings.
Interesting. Who is on the list?
Take Johnson and Johnson.
It's the world's largest pharma company by revenue.
It yields a tiny 1.93%.
Most yield chasers wouldn't even look twice at it.
No, they scroll right past it.
Exactly.
But the stock is up 33% year to date with a price target
pointing to another 4% upside from here.
Wow.
Or look at Linde.
They're the world's largest industrial gas supplier, oxygen, nitrogen,
argon, the yield and microscopic 1.30%.
That's tiny, very tiny, but analysts see a 19% upside with a price target near
$568 a share.
The shared DNA between these companies is what investors should really be hunting
for with the DNA.
They have low headline yields, sure, but they have very low to moderate pair ratios.
The payout ratio is just the percentage of their earnings they use to pay the
dividend.
Johnson and Johnson is around 60%, Linde is only 40%.
That means they have massive room to keep growing the dividend safely,
even if earnings hit a speed bump.
Right. They have a buffer.
Exactly.
You aren't reaching for a fat sticker yield.
You're buying elite quality income that grows from businesses that compound
their capital efficiently, which brings us to perhaps the ultimate example of a stock
left behind by the AI boom.
Colgate, Paul Maulov, a classic dividend king.
Yes.
That way, I have to play devil's advocate here for a second.
Colgate.
I mean, if we look at the macro environment, people are currently cutting budgets.
They are trading down to generic store brand dish soap and toothpaste to save money.
That is true.
And on top of that, Colgate is trading at a forward price to earnings ratio of 22.
That is basically the exact same valuation as high flying tech stocks like meta or alphabet.
Right.
How on earth does it make sense to buy a slow growth toothpaste company at the same
multiple as a tech giant?
It's a totally valid question.
And it really forces us to look at how we value risk in the market.
It all comes down to capital efficiency and risk adjusted returns.
Yes.
Colgate is dealing with macro economic headwinds and their operating profit margin
did drop from 28% in 2017 to 22% recently.
Right.
Which sounds bad.
It does.
But look at the mechanism of what they do with their cash.
Look at their ROIC.
A turn on invested capital.
Yes.
Their return on invested capital is a massive 23.9%.
Let's contextualize that.
If a company's cost to borrow capital is say 8%, but they are generating a nearly 24% return
on every dollar they put back into the business, they are printing shareholder value.
Oh, I see.
They don't need to invent the next microchip to make you wealthy.
Because of that efficiency, it is one of the lowest risk stocks in the entire market.
And it is quietly delivered a 15.7% return in 2026 already.
Plus, it's dividends.
Right.
And if you look at Colgate through a discounted cash flow model, which is essentially projecting
all the cash the business will ever make into the future and mathematically working backwards
to find its value today, the math points to fair price around $126.
Wow.
So from a current price in the low $90 that represents about a 38% upside.
Elite quality, even without a massive growth narrative, can be deeply undervalued when the entire
market is distracted by semiconductor stocks.
Colgate is like, it's like a compounding machine in a really boring wrapper.
Exactly.
It's not a rocket ship.
It's a glacier.
Yeah.
It moves slowly, but with a 24% return on invested capital, it just relentlessly carves out
entire mountains of wealth over time.
That is the perfect way to look at it.
Glaciers don't make headlines, but they reshape the landscape.
So to synthesize all of this, the core lesson of 2026 is that total return and underlying
quality will always be more powerful engines for wealth than chasing a flashy headline yield.
Without a doubt, or, you know, blindly trusting a diversified index that is secretly just
a massive concentrated bet on a handful of tech stocks.
Right.
Because if an 11% sticker yield usually comes at the cost of capping your total upside and a,
quote, unquote, safe 500 company index fund is actually just eight tech stocks during the ship.
Yeah.
It raises an important question for you, the listener.
When you look at your own portfolio, are you buying the actual underlying business or you
just buying the marketing label on the fund?
Are you buying the actual engine or are you just buying the paint job?
Thank you so much for joining us for this deep dive.
Keep asking those questions.
Keep looking under the hood of your investments.
And remember sometimes the most boring dish soap in the world can quietly outshine the flashiest
AI chip.
See you next time.