SCHD: Still the Gold Standard of Dividend ETFs -- or Is There a Better Option Now?

It may have underperformed pretty much everything else since 2023, including seemingly similar alternatives such as the iShares Core Dividend Growth ETF(NYSEMKT: DGRO) or the Vanguard Dividend Appreciation ETF(NYSEMKT: VIG). Nevertheless, the Schwab U.S. Dividend Equity ETF(NYSEMKT: SCHD) remains a top dividend-paying prospect for income investors.

That's not just because it offers a higher dividend yield. Rather, it's a great dividend prospect for the very reason it's lagged the market for the past three years. Let me explain.

The same, but different

Not all dividend ETFs are the same. Oh, some of them are certainly similar to others. The Schwab U.S. Dividend Equity exchange-traded fund, however, is distinct from nearly every other alternative in this category not because of what it owns, but what it doesn't own.

Meant to mirror the Dow Jones U.S. Dividend 100 Index, this fund doesn't hold positions in Apple, Broadcom, and Microsoft as the aforementioned VIG and DGRO do. These are tickers that technically pay ever-rising dividends, qualifying them for inclusion in most dividend-oriented indexes and funds. They just offer disappointingly poor yields; their owners hold them mostly for growth -- which they've delivered in spades since 2023, when the artificial intelligence revolution took hold.

With fewer red-hot leading positions in names including Texas Instruments, Coca-Cola, and Procter & Gamble, the Schwab ETF simply couldn't keep pace. But nothing lasts forever.

The environment is changing

That's not to suggest Schwab's popular dividend ETF is guaranteed to immediately close the performance gap from here. AI stocks may well continue to soar, drawing investors' interest away from dividend payers.

Image source: Getty Images.

The underlying dynamic that's been so bullish for growth stocks at the expense of dividend-paying value names, however, is getting more than a little long in the tooth. With higher interest rates now in place as we move into the latter half of an economic growth cycle, the certainty that consumer-staples outfits such as Coca-Cola and services names such as Verizon Communications -- another big dividend-paying SCHD holding -- becomes much more appealing.

When this shift solidifies, the Schwab U.S. Dividend Equity ETF is arguably one of the few dividend ETFs built to benefit from it rather than struggle because of it.

Still the best for this specific purpose

So for anyone seeking reliable income and income growth at a healthy starting yield, no, there's arguably not a better option than Schwab's U.S. Dividend Equity fund. It may not bring as much raw growth firepower as Vanguard's or iShares' top alternatives. But its underlying Dow Jones U.S. Dividend 100 Index specifically prioritizes a combination of higher yields and quality fundamentals – like lots of cash flow and minimal debt -- that aren't quite as prioritized with VIG and DGRO.

Just be sure it's a strong dividend yield and reliable dividend growth that you actually want, as opposed to capital gains with the added perk of a little bit of dividend income. In the long run, this seemingly small detail is actually a pretty big deal.

James Brumley has positions in Coca-Cola and Procter & Gamble. The Motley Fool has positions in and recommends Apple, Broadcom, Microsoft, Texas Instruments, and Vanguard Dividend Appreciation ETF. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.