The Schwab US Dividend Equity ETF(NYSEMKT: SCHD) is a highly popular exchange traded fund (ETF) that has attracted around $63 billion in assets. One reason for that is the yield, which at 3.4% is nearly three times larger than the 1.2% you could collect from an S&P 500 index ETF. But there's much more to the story than just yield that makes the Schwab US Dividend Equity ETF a great place to invest $1,000 or more today.
What does the Schwab US Dividend Equity ETF do?
The Schwab US Dividend Equity ETF is a passive exchange-traded fund, in that it tracks an index (the Dow Jones U.S. Dividend 100 Index) that uses a set screening approach to create a portfolio of 100 stocks. Humans, and their emotions, do not get involved (beyond having created the screens that are used to populate the index). The stock screening approach of the index, then, is the most important thing for investors to understand.
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The first step in creating the index is to look at stocks that have increased their dividends for at least 10 years. Real estate investment trusts (REITs) and master limited partnerships (MLPs), however, are removed from consideration. This creates a list of companies that have proven that they believe returning a growing stream of cash to investors is important. Moreover, it shows they have the wherewithal to support a growing dividend over an extended period of time. This is already a pretty strong list of stocks, but the Schwab US Dividend Equity ETF (or, really, the index it tracks) doesn't stop there.
This is just the pool from which the Schwab U.S. Dividend Equity ETF fishes. From this point, a composite score is created that includes cash flow to total debt, return on equity, dividend yield, and five-year dividend growth rate. Cash flow to total debt assesses financial strength, return on equity quantifies the strength of the business, dividend yield is clearly about the income that investors receive, and five-year dividend growth rate looks at dividend growth, which also hints at business growth. These are all things that you would probably be considering yourself if you were researching a dividend stock. The 100 stocks with the best composite scores get into the index and the fund, both of which are market cap weighted. The portfolio is rebalanced annually.
You get all of that for a tiny expense ratio of just 0.06%, which is extremely low.
Why is the Schwab U.S. Dividend Equity ETF a great high-yield ETF?
The first and most obvious reason why the Schwab U.S. Equity Dividend ETF is attractive is the elevated yield relative to the broader market, as measured by the S&P 500 index. But that's just the start. As noted, the Schwab U.S. Dividend Equity ETF is doing more than just picking a list of high-yield stocks; it is curating the list in a way that dividend investors would likely do themselves. The list of companies in the ETF is, effectively, made up of financially strong dividend stocks with high yields and a history of returning value to investors via regular dividend increases. And the cost is so low that it almost doesn't make sense to try to do the same thing yourself.
Moreover, the portfolio, with 100 stocks in it, is larger than most small investors could easily manage on their own. This provides diversification above what you could support in a portfolio built up one stock at a time. And with annual rebalancing, the Schwab U.S. Dividend Equity ETF is continually shifting the portfolio into the current most attractive investment candidates. This means it is cashing in on winning positions and reinvesting into more attractive options while also dropping stocks that haven't panned out as hoped. Creating a portfolio is hard, and maintaining it over time can be even harder. The Schwab U.S. Dividend Equity ETF does both for you.
Essentially, the Schwab U.S. Dividend Equity ETF is a solid all-in-one solution for investors looking for a high-yield ETF filled with high-quality stocks. And you only have to make one investment decision to get in on all this ETF offers.
The Schwab U.S. Dividend Equity ETF: A perfect dividend balance
You can find ETFs with higher yields than the Schwab U.S. Dividend Equity ETF. But you'll likely have to accept some trade-offs, like owning lower-quality companies or companies that don't have a history of dividend growth. That's the genius of the Schwab U.S. Dividend Equity ETF's approach -- it finds a healthy balance between quality and yield. If that sounds attractive to you, and it should, you'll want to consider adding this ETF to your portfolio today.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
