A dividend-focused exchange traded fund that has a large-cap value tilt is the Schwab US Dividend Equity ETF (NYSEArca: SCHD). Investors have piled into dividend focused ETFs over the past year in search of income, while dividend stocks have outperformed non-paying equities.
“The 42 dividend-themed ETFs that we follow raked in $16 billion in flows, nearly a third of every dollar going into equity ETFs, despite the fact that they make up just 5% by count of the 812 equity ETFs available. With the dividend yield on the S&P 500 Index at 2.1%, well above the 1.7% yield on the Barclays Aggregate Bond Index, who could blame investors for looking to equities?” Micheal Rawson for Morningstar wrote. [Three Dividend ETFs to Consider]
SCHD tracks an index that holds 100 stocks that meet certain criteria, specifically 10 years of consistently paying a dividend. The ETF is market-cap weighted, which leads to the tilt toward large-caps. A point of caution would be for investors to note how the holdings may overlap with other “core” funds and investments.
Dividend paying stocks have outperformed non-paying companies over the long term, partially due to the fact that really “glamorous” shares do not usually pay out. Paradoxically, academics have found that firms with high dividend payouts actually experience faster earnings growth, reports Rawson. [Best Dividend ETFs]
Buyers beware — dividend focused shares and ETFs may be an overcrowded trade at this point in time. Defensive sectors such as consumer staples, health care, and utilities all sell at a premium price/earnings valuation multiple compared with the overall market, says Rawson. Economically sensitive sectors such as energy, industrials, and materials sell at discounts to their five-year average P/E multiple because if the economy plunges, these earnings will nosedive.