Why Schwab U.S. Dividend Equity ETF Is a Good Investment

Why Schwab U.S. Dividend Equity ETF Is a Good InvestmentThis fund maintains a low-cost portfolio of durable dividend stocks, says Morningstar’s analyst.

Why Schwab U.S. Dividend Equity ETF Is a Good Investment

Ryan Jackson

Apr 25, 2022

Mentioned: PepsiCo Inc (PEP)Pfizer Inc (PFE)Schwab US Dividend Equity ETF™ (SCHD)

Schwab U.S. Dividend Equity ETF (SCHD) crafts a modified market-cap-weighted portfolio of disciplined dividend stocks with sound fundamentals. It applies constraints and buffers that diversify risk and curb turnover. This fund’s thoughtful construction and competitive fee earn it a Morningstar Analyst Rating of Silver.

The Dow Jones U.S. Dividend 100 Index, which this fund fully replicates, features 100 stocks that have paid dividends for at least 10 consecutive years and boast the financial health to continue their streak. Most of the top holdings are industry fixtures like PepsiCo (PEP) and Pfizer (PFE). The index mines the broad market for constituents but favors value stocks because it incorporates yield into stock selection. Selecting stocks based on yield alone can increase risk, but the fund’s fundamental requirements keep it out of trouble.

This fund’s focus on fundamentals promotes durable yield, as stocks on firm financial footing are well-positioned to continue dividend policies. It also allows the fund to tap into the quality factor, which has historically been tied to market-beating performance. The fund’s profitability measures, like return on invested capital, comfortably exceed the Russell 1000 Value Index, its Morningstar Category benchmark. Dividend-oriented companies with healthy balance sheets tend to be more insulated from the market’s movements, so this fund usually strikes a defensive stance.

This portfolio weights stocks by market cap, an efficient approach that channels the market’s collective view on each stock’s relative value. The fund takes a modified approach, however, limiting each stock’s weight to 4% of the portfolio and each sector’s weight to 25%. Concentration can bubble up in lean portfolios like this one, but these measures help the fund stay diversified.

This index features buffers that effectively mitigate turnover. These measures may bounce index candidates with better dividend and profitability resumes in favor of current occupants, but this is a worthy trade-off. Low turnover translates to low transaction costs, which come directly out of returns.

Key Proprietary Morningstar Metrics

Morningstar Analyst Rating: Silver
Process Pillar: Above Average
People Pillar: Above Average
Parent Pillar: Above Average

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