What is STXD? (Pros, Cons, and Strategies)

If you're debating how to build a robust retirement portfolio or seeking avenues for reliable income, dividend ETFs should be part of your considerations. One such promising option to explore is STXD, the Strive 1000 Dividend Growth ETF. This ETF is gaining traction for its investment in companies committed to dividend growth, making it a potential cornerstone for long-term investment strategies. In this blog post, we will dive into what STXD is, its fundamental advantages and disadvantages, and some strategic approaches to consider.

What is STXD?

STXD, or the Strive 1000 Dividend Growth ETF, is a relatively new but compelling entrant in the U.S. stock market's dividend ETF space. As the name suggests, its focus lies in investing in companies that not only pay dividends but consistently grow them year after year.

STXD tracks the Strive 1000 Dividend Growth Index, which prioritizes companies demonstrating a strong commitment to increasing their dividends over time, ensuring that investors gain from both dividend yield and dividend growth.

Key Features of STXD

• Dividend Commitment: Companies must have a minimum of five consecutive years of dividend payments.
• Market Capitalization: Eligible companies need to have a market cap of at least $1 billion.
• Liquidity: Companies should show an average daily trading volume of at least $1 million over the previous three months.

STXD selects the top 1000 companies by focusing on several critical financial metrics: cash flow to debt ratio, return on equity, annual dividend yield, and three-year dividend growth rate.

STXD Composition

STXD brings together a diversified list of large-cap companies known for their strong financials and steady dividend growth. Some of its top holdings include stalwarts like Johnson & Johnson (JNJ), Procter & Gamble (PG), Pfizer (PFE), and PepsiCo (PEP). This ETF tends to include companies across various sectors, reducing the exposure to any single industry and providing a balanced approach to dividend investing.

Pros of STXD

Consistent Dividend Growth

One of the major selling points of STXD is the consistent growth in dividends. The ETF focuses on companies that showcase robust and expanding dividends, ensuring a growing stream of income over time. This approach makes STXD a suitable choice for long-term investors eager to see their dividend income proliferate as they near retirement.

In recent years, the dividend growth rate for the companies within STXD has averaged around 8%, offering investors a meaningful increase year over year. This is particularly appealing for those planning for long retirement horizons, where the power of dividend compounding plays a significant role.

Diversification

STXD takes pride in its diversified portfolio, encompassing multiple sectors like healthcare, consumer goods, and financials. This diversification helps mitigate the risks associated with sector-specific downturns, providing a more stable investment experience.

Capital Growth Potential

While STXD's primary focus is on dividend growth, the ETF also offers potential for capital appreciation. By investing in financially stable companies with the ability to increase dividends, STXD might not only deliver income but also long-term capital gains, making it a dual-benefit investment.

Cons of STXD

Moderate Dividend Yield

With an average dividend yield of around 2.5% to 3%, STXD may not appeal to investors who are seeking high immediate income. Other dividend ETFs like SPHD or DGRO might offer higher yields, though they may come with higher risks or less reliable dividend growth.

Expense Ratio

STXD's expense ratio, while competitive at 0.10%, is higher than low-cost alternatives such as VYM or SCHD. For long-term investors, even slight differences in expense ratios can compound over time, affecting overall returns.

STXD Investment Strategies

Given its structure and objectives, STXD is best suited for certain investment strategies. Below, we outline a couple of approaches.

Long-Term Investment Strategy

For individuals planning for retirement or long-term wealth accumulation, a minimum investment horizon of 10 years would be ideal for STXD. The ETF’s focus on dividend growth rather than high immediate yield aligns well with long-term strategies where the power of compounding can be maximized.

Investors aiming for a long-term strategy can benefit from both growing dividends and capital appreciation of the underlying stocks. Over a decade or more, this dual growth potential can significantly bolster a retirement portfolio.

Dividend Reinvestment Plan (DRIP)

To harness the full potential of STXD, consider setting up a Dividend Reinvestment Plan (DRIP). By reinvesting dividends back into the ETF, you can accelerate the growth of your investment through the compounding effect. This strategy is particularly beneficial for younger investors who have a long time horizon and can tolerate short-term market fluctuations.

Balanced Portfolio Approach

While STXD is a robust option for dividend growth, it's wise to complement it with ETFs focusing on other market segments. For instance, pairing STXD with growth-oriented ETFs like QQQ or VGT can provide a balanced mix of high-growth potential and stable income. This diversified strategy helps reduce overall portfolio risk while capitalizing on various market opportunities.

Conclusion

STXD emerges as a promising option for investors looking to invest in companies with reliable and growing dividends. Despite its moderately lower yield and slightly higher expense ratio compared to some alternatives, its focus on financial stability and dividend growth make it an attractive choice for long-term, income-focused investors. By adopting a strategic investment approach, such as long-term holding and reinvesting dividends, you can effectively leverage STXD to bolster your retirement savings or achieve other long-term financial goals.