Key Points
Schwab U.S. Dividend Equity ETF seeks to buy well-run companies that are growing and offer attractive yields backed by rising dividends.
The ETF is basically doing what most dividend investors would do if they managed their own portfolio.
Schwab U.S. Dividend Equity ETF(NYSEMKT: SCHD) isn't perfect, but then no investment is. However, if you want a diversified portfolio of good dividend stocks, it could be the smartest investment you make right now. Here's why.
What does Schwab U.S. Dividend Equity ETF do?
Schwab U.S. Dividend Equity ETF tracks the Dow Jones U.S. Dividend 100 Index. The index is created using a fairly complex screening process. First, only companies (excluding REITs) that have increased their dividends annually for at least a decade are considered. This dramatically cuts down the list of potential investment candidates and focuses the exchange-traded fund (ETF) squarely on dividend stocks.
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From this point, the Dow Jones U.S. Dividend 100 Index gets even more selective. It creates a composite score that includes cash flow to total debt, return on equity, dividend yield, and five-year dividend growth rate. The 100 companies with the highest composite scores are included in the index. The stocks are weighted by market cap.
Without going into each factor, the goal of the composite score is to identify companies with strong, growing businesses and attractive, growing dividends. That is exactly what most dividend investors are looking to do, making Schwab U.S. Dividend Equity ETF a smart pick for dividend lovers. And given that it owns 100 stocks, it also provides instant diversification. The portfolio is updated annually, so you always own the stocks that rank highest on the composite score.
Data by YCharts.
Great cost versus benefit outcome
Since Schwab U.S. Dividend Equity's launch, the dividend has trended steadily higher, and so has the ETF's price. That's a great outcome. The current yield is around 3.5%, which is over 3 times larger than the yield of the S&P 500 index. That said, it is important to note that the dividend fluctuates from quarter to quarter. That is inherent to the nature of a pooled investment vehicle like an ETF, but the yearly rebalancing is also a contributing factor. You shouldn't buy this ETF expecting consistent dividends, though it is reasonable to expect the dividend to continue to generally rise over time.
The best part, however, is that you get all of the positives listed above for the modest expense ratio of 0.06%. Schwab U.S. Dividend Equity ETF's investment approach isn't going to be in favor all of the time, noting that it lagged the market in 2025. However, over time, it has proven to be a very smart and cost-effective choice for dividend lovers.
Should you buy stock in Schwab U.S. Dividend Equity ETF right now?
Before you buy stock in Schwab U.S. Dividend Equity ETF, consider this:
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Reuben Gregg Brewer has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
