Some exchange traded funds (ETFs) are easy to understand. Others are more complex. One is not necessarily better than the other, but sometimes increasing complexity allows you to get more out of a portfolio and result in an exceptional fund structure. That’s the case with this one Schwab US Dividend Equity ETF (NYSEMKT:SCHD).

Unlike many high-yield ETFs, this Schwab offering takes dividends to the next level and is worth buying even if you only have $500 for an entry-level position.

Would you do this if you wanted to buy dividend stocks?

When it comes to ETFs, the biggest issue you need to consider is portfolio methodology. This is not to say that return doesn’t matter or that return is irrelevant. However, these are bundled investment products where you essentially give your money to someone else to invest it on your behalf. You need to know what is being done with your money and why.

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As an example is this Vanguard High Dividend Yield ETF (NYSEMKT:VYM) has a dividend yield of 2.8%. Now it is SPDR Portfolio S&P 500 High Dividend ETF (NYSEMKT:SPYD) has a return of 4%. Why are the returns so different if both have the goal of generating income? The reason for this is that they approach investing very differently.

The Vanguard High Dividend Yield ETF looks at all dividend stocks except real estate investment trusts (REITs). The stocks that pay dividends are listed in a list ordered by dividend yield. The highest-yielding half of the list is included in the fund based on market capitalization weighting. This results in a very large portfolio because the starting pool consists entirely of stocks. Such a large portfolio means that lower-yielding stocks will be included in the list, reducing the ETF’s overall return.

The SPDR Portfolio S&P 500 High Dividend ETF, on the other hand, starts with the S&P 500 List of stocks and select the 80 stocks with the highest return, weighting their holdings equally. With a smaller starting list and a smaller final portfolio, higher returns dominate and the final portfolio offers more return.

Although this shows two different ways to create dividend portfolios, you probably wouldn’t follow either approach alone. This is where the Schwab US Dividend Equity ETF comes into play.

The Schwab US Dividend Equity ETF: More complex and easier to understand?

The Schwab US Dividend Equity ETF initially looks at companies that have increased their dividends for at least ten consecutive years, eliminating REITs from competition. This is a fairly typical screening for dividend investors, who often want to make sure they own companies that are committed to their dividends. None of the above ETFs take this factor into account, but you probably would.

After the Schwab US Dividend Equity ETF obtains the list of reliable dividend payers, it creates a composite score and uses it to rank the stocks from best to worst. The score takes into account cash flow to total debt (which highlights financial strength), return on equity (which highlights the company’s strength), dividend yield, and the company’s five-year dividend growth rate. Basically, the Schwab US Dividend Equity ETF looks for financially strong, high-yielding companies that have increased their dividends in the past.

This is exactly what most dividend investors are probably looking for. To be fair, the methodology here is far more complex than any of the ETFs mentioned above. But it makes logical sense to do what the Schwab US Dividend Equity ETF does. The final dividend yield of 3.3% is between the other two dividend ETFs. That’s still significantly more than the meager 1.2% offered by the S&P 500 index.

SCHD total return price data from YCharts.

Another small nuance: For the very low expense ratio of 0.06%, you get all the extra effort that the Schwab US Dividend Equity ETF offers. That’s the same cost as the Vanguard High Dividend Yield ETF and less than the 0.07% of the SPDR Portfolio S&P 500 High Dividend ETF. If you are looking for a high-yield dividend ETF, the Schwab US Dividend Equity ETF should be on your shortlist.

Sometimes adding a little complexity can be a good thing

The Schwab US Dividend Equity ETF is not nearly as easy to understand as some other popular dividend ETFs. But that’s not a bad thing. When you break it down, the Schwab US Dividend Equity ETF essentially does the same thing you would do if you wanted to invest on your own – buy good companies with strong dividend records and attractive yields.

Should you invest $1,000 in the Schwab US Dividend Equity ETF now?

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends the Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.