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High Quality, Low Fees With This Dividend ETF


Investors can now choose from a dizzying array of dividend exchange traded funds. While some of the dividend ETF offering have gotten progressively more exotic, plenty of investors still favor a plain vanilla approach to income investing.

The Schwab US Dividend Equity ETF (SCHD) qualifies as a plain vanilla dividend fund, but SCHD is also an example of boring being beautiful. Home to 101 U.S. large-caps, SCHD is just over two years old and has jumped almost 39% since its October 2011 debut. [Model Portfolios for Younger Investors]

SCHD “targets stable stocks that pay moderate, sustainable income. The resulting portfolio is one of the most quality-oriented among dividend ETFs, with almost all holdings earning either a wide or narrow Morningstar Economic Moat Rating. SCHD’s portfolio also has high projected earnings growth relative to competitors and a conservative payout ratio of under 50%. We think this fund is an appropriate core holding for most investors, even in the face of rising interest-rate concerns,” writes Morningstar analyst Abby Woodham.

Indeed, SCHD’s sector lineup shows the ETF is a valid rising rates option. While consumer staples, which are viewed as rate sensitive, are 26% of the ETF’s weight, utilities and telecom names combine for just 2.3% of SCHD’s weight.  Industrials, technology and consumer discretionary, three of the best sectors in rising rate environments, combine for nearly 42% of SCHD’s weight. [Some Dividend ETFs Stand Tall as Rates Rise]

SCHD also excludes rate-sensitive, yield-generating asset classes such as MLPs, REITs and preferred stocks from its lineup. A distribution yield of 2.52% is almost 35 basis points below the yield on 10-year Treasury yields, but there is something to be said for focusing on metrics other than high yields.

“Targeting the highest-yielding companies dilutes the benefits associated with a dividend strategy. Stocks usually provide high yields when their prices have been lowered because of distress in the economy or in anticipation of bland earnings growth or dividend cuts. Too high a yield can also indicate the market’s skepticism as to whether a payout is sustainable, and the market is usually right. Over the past 85 years, the highest-yielding quintile of stocks did not produce the best return or risk-adjusted return,” according to Morningstar’s Woodham.

SCHD offers other advantages, particularly for frugal investors. The ETF’s annual expense ratio of 0.07% is rock-bottom among dividend funds. It is even slightly cheaper than the rival Vanguard products and Schwab clients can trade SCHD commission-free. [Schwab Adds ETFs to Commission-Free Lineup]

Schwab US Dividend Equity ETF

Tom Lydon’s clients own shares of SCHD.