With the Federal Reserve standing pat on interest rate increases to this point in 2016, high dividend stocks and the related exchange traded funds have benefited in significant fashion. However, that does not change the fact that high yielders are vulnerable to higher interest rates.
That means that if the Fed significantly reverses course and sets off on a series off interest rate hikes, dividend ETFs heavy on rate-sensitive income assets such real estate investment trusts (REITs) and utilities could languish. In such an environment, investors would be better off with quality dividend growers over high yield fare.
Investors can access quality dividend stocks with impressive track records of dividend growth in the Schwab US Dividend Equity ETF (NYSEArca: SCHD). SCHD includes 100 stocks based on strong fundamentals, dividend yields and consistent dividend payouts for at least 10 consecutive years, and it has a 3.04% 12-month yield.
Company stocks that issue high dividend yields can be masking their distressed books or may not be sustainable and are heading for dividend cuts. Consequently, these quality dividend ETFs try to limit the impact of these value traps by requiring a history of sustainable dividend growth.
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.
[related_stories]“The portfolio turnover of this ETF for the latest fiscal year stood at 19%. This turnover is quite low and would help investors minimize their tax burden by not being exposed to high amounts of capital gains as compared to other funds with a higher turnover,” according to a Seeking Alpha analysis of SCHD.
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.
Schwab US Dividend Equity ETF
Tom Lydon’s clients own shares of SCHD.