As investors continue searching for yield and dependable streams of income, traditional equity-based dividend exchange traded funds should remain part of that conversation. That includes one of the least expensive options in the group, 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 2.90% 12-month yield. SCHD charges just 0.07%%, or $7 per $10,000 invested. Dividend growth as a means of trumping inflation could and arguably should serve to highlight the advantages of the ETFs that focus on dividend growth stocks. That group is comprised of well-established ETFs that emphasize dividend increase streaks as well as a new breed of funds that look for sectors chock full of stocks that have the potential to be future sources of dividend growth.
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.
“The reason SCHD is attractive as a long term investment is the ability of the underlying companies to outperform when the market is trading relatively flat. These dividend champions succeed in these environments because they are emphasizing returning cash to shareholders rather than trying to be the ones to grow the economy,” according to a Seeking Alpha analysis of SCHD.[related_stories]
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.
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.
For SCHD, “the sustainability of earnings used to fund dividends is a major consideration. If companies can grow earnings fast enough to grow dividends, SCHD succeeds as a long term investment,” according to Seeking Alpha.
For more news and strategy on the Dividend ETF market, visit our Dividends category.
Schwab US Dividend Equity ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.