Investors like dividends and low fees on their exchange traded funds, two reasons why the Schwab US Dividend Equity ETF (NYSEArca: SCHD) is a success.
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.
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.
SCHD’s “eligible securities are ranked by four metrics: cash flow-to-total debt, return on equity, indicated dividend yield and five-year dividend growth rate. These rankings are combined to create a composite score, and the top 100 ranked stocks are included in the index. The index constituents remain in the index as long as they are among the top 200 based on composite score on the year-end analysis. Stocks are weighted based on a modified market capitalization approach that caps single stock weights at 4.5% and industry weights at 25%,” according to a Seeking Alpha analysis of the ETF.
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.
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.
Income-minded investors have also typically gravitated toward these high quality companies as firms that regularly raise dividends also tend to be confident about their ability to continue paying the dividends as the dividend increases are also calculated in line with future growth
“All of the dividend-focused strategies had relatively better performance in their worst month (October 2008) in the dataset than the broad market. Despite the fundamental factor tilt of the Dow Jones U.S. Dividend strategy, it had a marginally higher standard deviation and marginally worse performance in the crisis than the other dividend strategies,” according to Seeking Alpha.
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Tom Lydon’s clients own shares of SCHD.