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 (NYSEArca: 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.