Any dividend exchange traded fund worth its should, whether directly or indirectly, have some emphasis on quality. The Schwab US Dividend Equity ETF (NYSEArca: SCHD) does and SCHD’s approach to consistency and quality has made it popular with frugal 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. [Quality Lifts This Dividend ETF]
SCHD “has a (slightly) above-average current yield, it has experienced above-average dividend growth, and it has a lower-than-average fee,” notes Ben Johnson, Morningstar’s global director of manager research for passive strategies.
Indee, SCHD makes good on the promise of low fees. With its expense ratio of 0.07% per year, SCHD is the least expensive dividend ETF on the market today. Schwab clients can realize additional cost savings because SCHD, like all other Schwab ETF’s, is available commission-free on the firm’s ETF OneSource platform.
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. [Quality Dividend ETFs]
As highlighted by the decade-long dividend increase requirement, SCHD takes dividend growth seriously and the ETF’s holdings affirm as much.
“In fact, during the past two years, SCHD has had the greatest aggregate dividend growth among all of its peers,” adds Johnson.
Four of SCHD’s top 10 holdings, a group that combines for almost 42% of the ETF’s weight, are Dividend Aristocrats, meaning they have dividend increase streaks of at least 25 years. 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. [Why This Dividend Delivers for Investors]
SCHD has another advantage: The ETF’s sector weights indicate the fund could prove durable if interest rates rise. Although SCHD’s largest sector allocation is 20.8% to rate-sensitive consumer staples names, the ETF’s utilities weight is a scant 0.7%.
Conversely, SCHD allocates a combined 32.6% of its weight to the technology and industrial sectors, two groups with track records of remaining durable (and possibly outperforming) when rates rise.
Schwab US Dividend Equity ETF