More investors are venturing outside the bond market for yield and income in a low-rate environment. Equity ETFs that track high-quality, large-cap companies with healthy balance sheets to support stable dividend payouts are a popular choice.
For instance, Morningstar ETF analyst Michael Rawson suggests investors should consider the Schwab U.S. Dividend Equity ETF (SCHD) , which tracks the Dow Jones U.S. Dividend 100 Index. With a 0.07% expense ratio, SCHD is a cheap ETF that provides exposure to high-quality, wide-moat stocks, or well-established firms that have a comparative advantage in a given market. The fund has a 2.86% 12-month yield.
“More than 60% of the fund’s holdings carry a wide moat rating, which suggests they have greater capacity than their peers to increase their dividend payouts in the future,” Rawson said. “This quality tilt can damp volatility during market downturns but might also cause it to lag in bull markets when investors pile into riskier assets.” [Where to Find Yield in ETFs with Less Risk]
SCHD only holds stocks that have made a dividend payment in each of the past 10 years. Additionally, the ETF also uses weighting methodology that limits its exposure to any single company or industry, further diversifying its holdings.
“Chasing high-dividend-yielding stocks can skew a portfolio toward distressed companies that have high yields only because their fundamentals have deteriorated,” Rawson said. “Because these stocks may underperform during market downturns and remain out of favor for several years at a time, diversified dividend funds that balance yield with quality can provide a better way to gain access to equity income.”
Market observers have noticed that reinvested divdends accounted for almost half of stocks’ total annualized returns in the past century. Stock researchers also found that dividend payers have consistently generated higher returns than non-dividend payers, with less risk.
“They impose greater discipline on managers by reducing their capacity to engage in value-destructive empire-building,” Rawson added.
Schwab U.S. Dividend Equity ETF
For more information on dividends, visit our dividend ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.