The Schwab US Dividend Equity ETF (NYSEArca: SCHD) is a solid idea for investors looking to bolster income at a low fee. SCHD includes 100 stocks based on strong fundamentals, dividend yields and consistent dividend payouts for at least 10 consecutive years and 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.
“The fund’s profitability tilt is evident. Its return on invested capital has been nearly double the category average since the fund’s inception,” said Morningstar. “Its ROE and return on assets have also been higher than the category averages since its inception. This strategy launched in October 2011, so it has not yet been through a bear market. From its inception through December 2017, the fund returned 15.2% on an annualized basis, outpacing its category by 1.7% annually with less risk. Its favorable overweighting to the technology sector and stock selection within the industrials sector have contributed the most to its outperformance.”
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 sheets.
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
“The fund’s value and profitability tilts should continue to influence its performance,” according to Morningstar. “Both of these characteristics have been associated with higher returns over the long term, but they don’t always pay off. For instance, in the United States, value stocks lagged their growth counterparts over the fund’s life, which detracted from its performance. But its profitability tilt gave it a small return boost.”
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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.