Dividend investors have to take a lot of different factors into consideration when buying individual stocks. Those factors don’t go away just because you are buying a dividend-focused exchange-traded fund (ETF). In fact, because you are giving your money to someone else to manage when buying an ETF, you should have a good understanding of how the fund invests your money. The Schwab US Dividend Equity ETF(NYSEMKT: SCHD), which trades for well under $100 per share, stands out as an attractive option for income investors.
From a big-picture perspective, the Schwab US Dividend Equity ETF essentially does what you would likely do if you were buying dividend stocks one by one. The ETF invests in companies that are financially strong and well run, have histories of dividend growth, and sport attractive yields.
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To do this, the Schwab US Dividend Equity ETF tracks the Dow Jones Dividend 100 Index, which focuses on only those companies that have increased their dividends for 10 consecutive years or more (real estate investment trusts, or REITs, are removed from consideration). Once it has this list, a composite score is created based on cash flow to total debt, return on equity, dividend yield, and the company’s five-year dividend growth rate.
Each factor is important. Cash flow to total debt looks at financial strength. Return on equity examines business quality. Dividend yield is, well, dividend yield. And the five-year dividend growth rate represents stability and management’s commitment to returning capital to shareholders. The 100 highest-scoring companies are included in the Dow Jones Dividend 100 Index and weighted by market capitalization. The Schwab US Dividend Equity ETF works to replicate the holdings and returns of the index, and it does so with a very modest expense ratio of 0.06%.
The first reason to like the Schwab US Dividend Equity ETF is that its underlying screening criteria largely match what income investors are usually looking for in a dividend stock.
The second reason to buy it is performance. The ETF’s dividend yield is 4.0% as of this writing, well above the scant 1.3% you would collect from an S&P 500 index fund.
The yield is clearly attractive, but look at the graph above. Over time, the dividend has trended higher along with the price of the ETF. That means a growing income stream and share price appreciation, which is pretty much the ideal outcome for most dividend investors.
Meanwhile, thanks to regular rebalancing by the Dividend 100 index, the Schwab US Dividend Equity ETF also regularly adjusts its holdings so it is invested in the most attractive dividend stock candidates based on the screening requirements.
If you have $100 and want to own a reliable dividend investment, then the Schwab US Dividend Equity ETF is likely to be a smart choice for you. That $100 will get you three full shares as of this writing, and if your brokerage offers fractional shares, you can buy closer to four of them.
Sure, there are dividend-focused exchange-traded funds that are less complicated. They might track indexes that simply select stocks based only on dividend yield, for example. But buying based on yield alone can leave you with a portfolio of high-risk investments. The Schwab US Dividend Equity ETF helps you screen for quality dividend stocks without having to do any of the complicated work. A generous yield, growing dividend, and capital appreciation can all work together to make this a top pick for income investors.
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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.
