I Own SCHD, and I Still Believe in It. Here's Why I Also Bought This 10.5%-Yielding ETF Almost Nobody Knows About.

I hold a growing position in the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). I still believe in this top dividend ETF and plan to continue building my position.

However, I recently came across a little-known ETF that has delivered a trailing 12-month yield of 10.5%, more than triple SCHD's level. The fund has also delivered a 17.2% average annual total return since its inception in 2019, outperforming the S&P 500 (16.2%) and SCHD (13.8%).

Here's why I still plan to continue investing in the Schwab U.S. Dividend Equity ETF while also layering in this new position.

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A top dividend ETF

The Schwab U.S. Dividend Equity ETF is, in my opinion, the gold standard among dividend ETFs. The passively managed fund holds 100 top dividend stocks that offer both yield and dividend growth. Its trailing 12-month yield of 3.1% is triple the S&P 500's level. Meanwhile, its holdings have grown their dividends at an average annual rate of 9.4%. That combination of yield and growth has enabled the fund to deliver strong total returns throughout its history. That makes it a core ETF to buy and hold long term, even if income isn't your primary goal.

Another compelling income option

While I will continue to buy SCHD, I also recently started a position in the Overlay Shares Large Cap Equity ETF (NYSEMKT: OVL). It's an actively managed fund that seeks to outperform the S&P 500's total return through a combination of capital appreciation and income production from an options overlay strategy.

However, unlike other income ETFs that write call options to generate income (e.g., JEPI or JEPQ), OVL sells put options. It uses a put credit spread strategy in which it writes out-of-the-money (i.e., below the current market price) put options on the S&P 500 index while simultaneously buying an even lower-strike-price put option for protection. This trade generates a net credit, which provides the fund with income to distribute to investors each month. Additionally, the ETF provides direct upside exposure to the S&P 500 by investing in the Vanguard S&P 500 ETF.

Income ETFs that write call options cap the upside. By writing puts instead of calls, this fund doesn't cap the upside. That has enabled it to outperform the S&P 500 while also generating income for investors.

However, that's not a risk-free trade-off. The put options add some downside exposure, with the risk capped at the lower strike price. Additionally, this is a small ETF ($411 million in assets under management compared to $112 billion for SCHD) with a much higher expense ratio (0.79% for OVL compared to 0.06% for SCHD)

An income complement, not a competitor

I view OVL as a complement to my income strategy, not as a competitor to SCHD or a replacement for it. SCHD is a large fund that holds 100 top high-yield dividend growth stocks that should provide me with a growing stream of dividend income. OVL offers the potential to earn much higher income through its options overlay strategy, while delivering a higher total return relative to the S&P 500 in a flat-to-rising market. However, it's riskier, as income generation will be lumpier, with greater downside risk during a stock market sell-off. That's why I plan to keep my allocation small, relative to SCHD.

Matt DiLallo has positions in JPMorgan Equity Premium Income ETF, JPMorgan Nasdaq Equity Premium Income ETF, Listed Funds Trust-Overlay Shares Large Cap Equity ETF, and Schwab U.S. Dividend Equity ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.