Consistency, Quality Fuel Rise of Schwab Dividend ETF

In a growing universe of exchange traded funds focusing on dividends, finding standouts is becoming harder. More difficult, but not impossible as one of the standouts comes courtesy of a familiar name.

The Schwab US Dividend Equity ETF (NYSEArca: SCHD) has rapidly made its presence felt in the dividend ETF arena. Still several months away from its third anniversary, SCHD has over $1.8 billion in assets under management. An emphasis on consistency and quality has made SCHD a hit among income investors.

SCHD tracks the Dow Jones U.S. Dividend 100 Index, which not only features some of the largest U.S. dividend payers, but also only those companies with at least 10 years of increased payouts, a familiar trait among some dividend funds. [Sun Rises for Dividend ETFs Again]

“We like the way the index is constructed and that these stocks are consistent dividend payers,” said Schwab Senior Vice President John Sturiale in an interview with ETF Trends. “Getting the largest of the consecutive dividend payers made us comfortable with the index methodology.”

Sturiale adds that SCHD’s underlying focuses on other quality factors such as return on equity, cash flow to debt ratios, dividend yield and five-year dividend growth, noting that “sustainable dividends equal a higher quality company.”

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. Each of the ETF’s top-10 holdings, a group that combines for about 43% of the ETF’s weight, are members of the Dow Jones Industrial Average.

That group includes Johnson & Johnson (NYSE: JNJ), Procter & Gamble (NYSE: PG) and Coca-Cola (NYSE: KO), companies with three of the longest dividend increase streaks in the U.S. Additionally, SCHD features exposure to newer dividend payers, such as Microsoft (NasdaqGS: MSFT). Microsoft’s dividend has more than doubled in the past four years. SCHD’s weight to the technology sector is 12.6%. [Low-Cost Dividend ETF Focuses on Quality]

On the other hand, financial services stocks account for just 2% of SCHD’s weight, keeping the ETF mostly immune from volatility in that group. Staples and industrials combine for 38.7% of the ETF’s weight.