Though not always by intention, many dividend exchange traded funds also feature an emphasis on the quality factor. That is not surprising when considering a company’s ability to generate free cash so that a dividend cannot only sustained but grown over time plays prominently in the quality factor.
The $2.1 billion Schwab US Dividend Equity ETF (NYSEArca: SCHD) is a prime example of a dividend ETF that can also be considered a quality ETF. 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. [Quality Fuels This Dividend ETF]
However, SCHD does more than offer investors another ETF with an emphasis on dividend increase streaks. A dividend increase streak is useful for getting investors interested in a stock or ETF, but there has to be more meat on the bone to sustain that dividend growth. SCHD features that added meat by focusing on other quality factors such as return on equity, cash flow to debt ratios, dividend yield and five-year dividend growth.
“Stocks are also subject to screens for dividend payment consistency, size, and liquidity. Stocks are weighted based on a modified market capitalization approach. Individual stocks are capped at 4.5% of the index, and sectors are capped at 25%,” according to an analysis of SCHD by David Van Knapp on Seeking Alpha.
An overlooked advantage of SCHD is an emphasis, though not always advertised, on wide moat companies, or those firms with deep competitive advantages over rival firms.
SCHD has made a name for itself not only by way of its scant 0.07% annual expense ratio, which makes it the least expensive U.S. dividend ETF, but also by virtue of its high-quality holdings. SCHD’s top-10 holdings include Dow components Procter & Gamble (NYSE: PG) and Coca-Cola (NYSE: KO), two of Warren Buffett’s Berkshire Hathway’s (NYSE: BRK-A) largest holdings. Remember that Buffett is one of the godfathers of wide moat investing. [A Dividend Moat ETF]
SCHD’s scant expense ratio ensures it is the least expensive U.S. dividend ETF. Yes, SCHD is even less expensive than the rival Vanguard Dividend Appreciation ETF (NYSEArca: VIG), which charges 0.1% per year.