The Schwab US Dividend Equity ETF (NYSEArca: SCHD) is up just over 4% this year. While that lags the broader market, SCHD’s solid performance reiterates that this is a credible option for cost-conscious, conservative investors looking for equity income.
SCHD includes 100 stocks based on strong fundamentals, dividend yields and consistent dividend payouts for at least 10 consecutive years.
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.
“Schwab states that SCHD offers a convenient, low-cost way to capture the performance of high dividend yielding U.S. stocks issued by companies with a record of consistent dividend payments. It also says that SCHD provides the potential for both current income and capital appreciation, and that it may add diversification to an income stream,” according to a Seeking Alpha analysis of the ETF.
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.
“SCHD’s 3-year compound annual dividend growth rate through the end of 2016 is 11.9% per year,” according to Seeking Alpha. “2016 was its 6th year of increasing dividends if you count its start-up year (2011) as Year 1.”
Companies with a record of raising dividends are more attractive than usual since they issue their dividends cautiously. These dividend payers typically include higher quality companies that are more cautious when raising dividends since they would do so without stretching their balance.
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Tom Lydon’s clients own shares of SCHD.