Investing in Schwab U.S. Dividend Equity ETF: A Strong Yield Alternative

Currently, investing in an S&P 500 index fund yields a modest 1.3%. While individual stocks may offer better returns, they require significant time for research and management. A more efficient choice might be an exchange-traded fund (ETF), specifically the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). This ETF delivers a yield of 3.7%, nearly three times that of the S&P 500.

Understanding the Schwab U.S. Dividend Equity ETF

The Schwab U.S. Dividend Equity ETF employs various strategies for selecting dividend-paying companies. Initially, it focuses on firms that have consistently increased their dividends annually for at least a decade, showcasing strong financial health.

Dividend investors often utilize this criterion, though the ETF excludes real estate investment trusts (REITs) to prevent their dominance in the portfolio.

Image source: Getty Images.

Next, the ETF creates a composite score for each remaining candidate. This score evaluates cash flow relative to total debt, return on equity (ROE), dividend yield, and the company’s five-year dividend growth rate.

By analyzing cash flow and ROE, the ETF gauges financial strength and company quality—two factors critical for dividend investors. Incorporating both yield and growth rate into the scoring allows for a nuanced assessment of potential investments.

The 100 firms with the highest composite scores are included in the ETF’s portfolio. These stocks are weighted by market capitalization, meaning larger companies will have a more significant impact on overall performance. The ETF maintains an expense ratio of just 0.06%, making it a cost-effective option.

Performance of Schwab U.S. Dividend Equity ETF

The Schwab ETF stands out by offering yields that surpass market averages while also appreciating in value. This dual benefit appeals to dividend investors looking for both income and capital growth.

SCHD data by YCharts.

Importantly, the ETF has shown consistent growth in its dividend payouts. Although quarterly dividends fluctuate, the general trend indicates an upward trajectory.

SCHD Dividend data by YCharts.

Capital growth and dividend increases work synergistically. As the portfolio expands, there’s more capital available for reinvestment, often leading to higher yields from new investments during annual rebalancing.

Considerations for Investing in the ETF

While the Schwab U.S. Dividend Equity ETF may not be perfectly tailored to individual preferences, it offers a straightforward means of accessing high-quality dividend stocks. Potential investors should weigh the modest yield against their specific investment goals.

Is Now a Good Time to Invest in Schwab U.S. Dividend Equity ETF?

Before making an investment, potential buyers should note:

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.