Investors fixated on income often feel tempted to chase after stocks with the highest yields, hoping to ramp up the cash flowing from their portfolios. However, if you’ve ever tried this, you know it can backfire. Simply targeting high-yield stocks can lead you to companies with shaky operations, eventually leading to disappointing returns due to painful dividend cuts.
This is where an exchange-traded fund (ETF) like the Schwab U.S. Dividend Equity ETF (SCHD -0.54%) becomes intriguing. Here’s why this income-driven ETF deserves your attention today.
How does the Schwab U.S. Dividend Equity ETF operate?
The Schwab U.S. Dividend Equity ETF starts by narrowing down its selection to stocks with a track record of at least 10 consecutive years of dividend hikes (excluding real estate investment trusts from the mix). This is a stringent criterion that only businesses with solid and consistent performances can meet. This strategy lays the groundwork for an investment approach that smartly aims to balance yield alongside company quality.
With the groundwork laid, the next step is creating a composite score for each company in its selection pool. To achieve this, the ETF evaluates metrics such as cash flow relative to total debt, return on equity, dividend yield, and a company’s five-year dividend growth rate. Cash flow to total debt gauges financial strength, return on equity assesses company quality, while dividend growth and yield are key income factors.
Based on these scores, companies are ranked from top to bottom, with the 100 highest-scoring companies securing a spot in the portfolio. The holdings are weighted by market capitalization, meaning larger companies exert a more significant influence on performance. Like most ETFs, the portfolio is revisited regularly (annually) to ensure it remains stocked with the best investment options. And you get all these benefits with a modest expense ratio of just 0.06%.
SCHD data by YCharts
What makes Schwab U.S. Dividend Equity ETF appealing?
The straightforward reason Schwab U.S. Dividend Equity ETF stands out as an excellent income option is that it mirrors a disciplined approach you would employ when hunting for a solid dividend stock. Having financially robust companies with promising businesses and high yields is undoubtedly appealing.
However, the ETF employs more stringent criteria than merely cherry-picking top-yielding stocks, leading to a yield of about 3.6%. While it’s notably higher than the S&P 500’s 1.2% yield, numerous other ETFs boast even heftier yields.
You might consider investing in some of those for extra yields, but the foundation of any strong portfolio often rests on financially sound companies backed by solid businesses—the cornerstone of what Schwab U.S. Dividend Equity ETF offers. It’s a single investment that dividend investors should consider making a central part of their holdings.
Since it updates its portfolio annually, you can count on it not to drift away from its strategy of selecting reputable companies with attractive dividend yields. Each year, the ETF remains packed with the finest dividend stocks.
SCHD Dividend Yield data by YCharts
That said, don’t think Schwab U.S. Dividend Equity ETF is exclusively for ETF enthusiasts. It’s also a solid foundation for building a portfolio of individual stocks. Just be mindful not to unintentionally duplicate investments within the ETF’s roster unless that’s your intention.
Why Schwab U.S. Dividend Equity ETF is a wise long-term bet
Opportunities as promising as Schwab U.S. Dividend Equity ETF don’t appear often. And when they do, they can get bid up so high they lose their appeal. Fortunately, due to the nature of ETFs, this isn’t a risk with Schwab U.S. Dividend Equity ETF.
The key is to appreciate the ETF’s approach—if you recognize its value, consider buying it and holding it indefinitely. Timing your purchase should be the least of your worries, especially if you’re still accumulating savings. If that’s the case, continuously adding to the ETF whenever feasible allows you to reap the long-term benefits of its strategic investment approach.
