The S&P 500 index is near all-time highs, pushing the yield on the index down to a scant 1.3% or so. You can get a yield that's more than twice as high, at 3.4%, with Schwab U.S. Dividend Equity ETF(NYSEMKT: SCHD). But if you have $1,000 or more to invest right now, this ETF has a lot more to offer than just its yield.
You can get higher yields than the Schwab U.S. Dividend Equity ETF
If all you care about is the dividend yield, you can easily find exchange-traded funds (ETFs) that have higher yields. For example, SPDR Portfolio S&P 500 High Dividend ETF(NYSEMKT: SPYD) is offering a 4.4% yield. On an absolute basis, that's just one percentage point more, but on a percentage basis, that's a huge step-up in yield.
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But you can't just look at dividend yield, especially when the market is near all-time highs. Specifically, SPDR Portfolio S&P 500 High Dividend ETF basically just buys the 80 highest-yielding stocks in the S&P 500 index.
While it is true that the S&P 500 constituents are hand-selected to represent the broader economy when they are added to the index, the highest-yielding stocks often include companies facing difficult times, such as Hasbro, which suffered a 9% year-over-year revenue decline in the first quarter of 2024 as it works on a company "transformation." This is not to suggest that Hasbro is a bad company, but it certainly isn't one that's hitting on all cylinders today.
Schwab U.S. Dividend Equity ETF goes about finding dividend stocks differently.
Notably, it doesn't focus on dividend yield over all other things. It starts the process by looking for companies that have increased their dividends for at least 10 consecutive years. (Real estate investment trusts, or REITs, are eliminated from the selection process.) Looking at regular dividend increasers helps to limit the pool of companies to those that have been achieving business success and have the financial strength to hike dividends regularly.
Schwab U.S. Dividend Equity ETF goes deeper than dividends
But regular dividend increases are just the start for Schwab U.S. Dividend Equity ETF. After it has this pool of candidates, it creates a composite score that looks at both yield and company quality.
The factors in the screen include cash flow to total debt, which is basically an attempt to focus on financially strong companies. It adds return on equity, which helps identify companies that have strong financial results. It ranks the five-year dividend growth rate, which is another way to highlight financial strength, but one that is specific to income-oriented investors. And then it looks at dividend yield, which is clearly intended to highlight higher-yielding stocks and increase the ETF's overall yield.
After Schwab U.S. Dividend Equity ETF has that composite score, it ranks the scores from best to worst. The 100 highest-ranked companies are selected for the ETF and weighted by market capitalization. In this way, the largest, most attractive companies will have the biggest impact on the ETF's overall performance.
The end result is an ETF that provides an attractive yield that is backed by a list of companies that are financially strong. That's a good thing to consider today because of the swift advance that has taken place in the stock market. Bull market runs often lead investors to buy stocks indiscriminately, allowing even weaker companies to show big stock price gains.
Schwab U.S. Dividend Equity ETF specifically tries to weed out weak companies, placing investors into stocks that will likely be better able to handle a market and/or economic downturn.
Yield alone isn't the end of the story
There's nothing wrong with buying stocks based on their dividend yield. But yield alone isn't the best way to find good-quality companies -- you need to examine more factors.
And that's exactly what Schwab U.S. Dividend Equity ETF does for investors. If you want a mix of yield and quality as Wall Street reaches toward new highs, knowing that a bear market will eventually come along, then Schwab U.S. Dividend Equity ETF may be the best place for your cash today.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Hasbro. The Motley Fool has a disclosure policy.
