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A Dividend ETF for Thrifty Investors

This article was originally published on ETFTrends.com.

Dividend exchange traded funds are usually pricier than plain vanilla, broad market domestic equity funds, but there are still plenty of cost-effective dividend ETFs on the market today. One of the leaders of that group is the Schwab US Dividend Equity ETF (SCHD) .

SCHD includes 100 stocks based on strong fundamentals, dividend yields and consistent dividend payouts for at least 10 consecutive years and charges just 0.07%, or $7 per $10,000 invested.

SCHD “is a compelling fund for exposure to profitable, large-cap U.S. stocks with attractive dividend yields. Focusing on profitability and yield lowers the risk that the portfolio holds companies that cannot support their dividend payments,” said Morningstar in a note out Friday.

A dividend increase streak is useful for getting investors interested in a stock or ETF, but there has to be more meat on the bone to sustain that dividend growth. SCHD features that added meat by focusing on other quality factors such as return on equity, cash flow to debt ratios, dividend yield and five-year dividend growth.

Companies with a record of raising dividends are more attractive than usual since they issue their dividends cautiously. These dividend payers typically include higher quality companies that are more cautious when raising dividends since they would do so without stretching their balance sheets.

Cheap Can Be Good

“From its inception in October 2011 through September 2018, the fund outpaced its average peer by 1.5% annualized with slightly less risk,” said Morningstar. “The fund's low fee, favorable overweighting to the technology sector, and stock selection within the industrials sector contributed the most to its outperformance.”

Income-minded investors have also typically gravitated toward these high quality companies as firms that regularly raise dividends also tend to be confident about their ability to continue paying the dividends as the dividend increases are also calculated in line with future growth.

“The fund balances a firm's profitability level and yield so that it selects names that are more likely to be able to support their dividends,” according to Morningstar. “The fund assigns half of its equally weighted scoring metrics to profitability measures: cash flow/debt and return on equity. If a stock is more profitable, then it should be better equipped to maintain its dividend during a market drawdown or increase its dividend payment in the future.”

Morningstar has a silver rating on SCHD.

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