Some dividend exchange-traded funds are lagging the broader market this year, but that does not mean income-starved investors should take their eyes off the dividend ETF ball. The popular Schwab U.S. Dividend Equity ETF (NYSE: SCHD) is up about 5 percent year to date, well behind the S&P 500, but SCHD remains a solid idea for investors looking easy-to-understand dividend exposure via the ETF wrapper.
Dividend ETF SCHD
SCHD follows the Dow Jones U.S. Dividend 100 Index, which mandates member firms have a minimum dividend increase streak of 10 years. The ETF debuted in October 2011 and now has more than .5 billion in assets under management. To be precise, SCHD holds 118 stocks.
SCHD takes “the U.S. stocks that pay dividends, targets the upper half and then scores those on an equally-weighted metric of cash flow to debt, return on equity, indicated dividend yield — so the forward dividend yield for the next 12 months — and then five-year dividend growth history,” said Morningstar in a recent note.
Quality With Value Exposure
SCHD can be deemed a quality ETF with some value exposure. Importantly, many of SCHD's holdings are considered wide-moat firms by Morningstar.
Another reason SCHD is a hit with investors is its low fee. The ETF charges just 0.07 percent per year, or the equivalent of $7 on a $10,000 investment. That makes the ETF one of the cheapest U.S. dividend funds. Further cost savings can be realized by Schwab clients as SCHD is available on Schwab's commission-free ETF OneSource platform.
“Using this equal-weighted composite it screens out the top 100 names and then equal weights those. So, in this case, you have a market-cap-weighted fund that's screening out systematically some of the lesser-quality names that may cut their dividends which helps it to generate higher-quality dividend-paying names, but it still lands in the large-cap value category,” Morningstar said of SCHD.
Consumer staples and technology stocks combine for 47 percent of SCHD's weight. SCHD's more than 22 percent allocation to technology stocks is one of the largest among U.S. dividend funds. Industrial and consumer discretionary combine for almost 27 percent of SCHD's roster. Lower quality energy stocks are less than 6 percent of the fund's weight and SCHD has a barely noticeable half percent weight to interest rate-sensitive utilities stocks.
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