If you want to make your investing life as simple as possible, exchange-traded funds (ETFs) should be on your radar screen. However, you can’t just look at the name of an ETF and assume anything, since each one is a little different.
When it comes to dividend stocks, Schwab US Dividend Stock ETF (NYSEMKT:SCHD) advances the dividend story, which could make it the best dividend ETF for you. Here’s what you need to know.
What does the Schwab US Dividend Equity ETF do?
Much focused on dividends exchange traded funds just look at the dividend yield. For example, SPDR Portfolio S&P 500 High Dividend ETF (NYSEMKT:SPYD) buys the 80 most profitable stocks in the S&P 500 index. It doesn’t matter if the stocks are financially strong or weak, or if they have a history of operating at a high level or lag behind the industry.
This may be fine for some investors, but others may want to be a little more discerning. This is where the Schwab US Dividend Equity ETF comes in.
First, the ETF required that the securities have at least 10 years of annual dividend increases behind them. Then it creates a composite score based on cash flow versus total debt, return on equity, dividend yield and five-year dividend growth rate. The ETF then ranks stocks from best to worst on its composite score, selecting the top 100 names, weighted by market cap, for inclusion in the Schwab US Dividend Equity ETF. (Note that real estate investment trusts are specifically excluded from portfolio consideration.) This is because the ETF attempts to strike a balance between quality and return.
Is the Schwab US Dividend Equity ETF right for you?
The unique portfolio construction here has important implications for dividend investors. For starters, chances are you can find an ETF that offers a higher yield. As noted, the SPDR Portfolio S&P 500 High Dividend ETF focuses solely on high-yielding stocks and has a dividend yield of 4.6%. That’s more than a percentage point higher than the 3.4% return of the Schwab US Dividend Equity ETF. If all you care about is yield, then the Schwab US Dividend Equity ETF might not be right for you.
However, if you want to own high-quality dividend stocks, you shouldn’t just focus on dividend yield. There are other factors you need to consider, and that’s exactly what the Schwab US Dividend Equity ETF is designed to do. But some statistics will be useful here.
The largest sectors in the SPDR Portfolio S&P 500 High Dividend ETF are real estate (26% of assets), financials (20%), and utilities (18%). This represents almost two-thirds of the portfolio in just three sectors. The Schwab US Dividend Equity ETF’s top sectors are financials (17% of assets), healthcare (15%), consumer staples (13%), industrials (13%), and energy (12%). %), which together represent approximately 70% of assets. wallet. There’s a huge difference in diversification here, and Schwab’s approach places the fund more in growth-oriented sectors.
Dividends are great, but focusing solely on dividend yield can skew your portfolio in ways you might not want. The Schwab US Dividend Equity ETF attempts to find a better approach by integrating yield, dividend growth and company quality.
If you care about more than performance…
There’s nothing wrong with buying an ETF that only looks at dividend yield, but you need to be sure that this approach is actually what you want. For many investors, considering quality will be a more attractive way to invest in dividend stocks. And if that sounds like something you want, the Schwab US Dividend Equity ETF could easily become the best dividend ETF for you.
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Ruben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the securities mentioned. The Mad Motley has a disclosure policy.
Is the Schwab US Dividend Equity ETF the best dividend ETF for you? was originally published by The Motley Fool
