Income investors can utilize low-cost exchange traded funds to track stable, quality stocks with sustainable dividend yields.
For instance, the Schwab US Dividend Equity ETF (NYSEArca: SCHD) tracks companies that have paid a dividend for the past 10 consecutive years. The fund selects components based on four metrics, including cash flow-to-debt ratio, return on equity, dividend growth and dividend yield. Moreover, SCHD comes with a low 0.07% expense ratio. [Watch the Fees on Dividend ETFs]
“What you get is a portfolio that yields only slightly higher than the S&P 500 but is very high-quality,” according to Morningstar analyst Abby Woodham.
SCHD shows a 2.54% 12-month yield and is up 3.1% year-to-date. In comparison, the S&P 500 Index is up 3.0% so far this year and has a dividend yield of 2.36%.
Due to the ETF’s indexing methodology, SCHD includes quality names, with 60% of its holdings exhibiting wide economic moats – a competitive advantage or dominant market position that a company has over rivals. Specifically, these companies have stable earnings high profitability, low debt and healthy dividends. [Sun Shines on Dividend ETFs Again]
“The thesis is that high-quality firms – those with above-average gross profitability, low leverage, and steady earnings – have historically outperformed junkier stocks over time,” Woodham added.
For instance, the conservative consumer staples is the ETF’s largest sector weight at 22.2% of the portfolio, followed by industrials 16.8% and energy 13.1%. Top component holdings include Exxon Mobil (NYSE: XOM) 4.7%, Johnson & Johnson (NYSE: JNJ) 4.7% and Chevron (NYSE: CVX) 4.7%.