Skip to Content
ETF Specialist

A New Dividend ETF for Schwab, but Has This Trade Become Crowded?

Dividend ETFs have become very popular with investors, but is the group overvalued?

Mentioned: , , , , , , , ,

Dividend-themed exchange-traded funds have been a popular choice among investors over the past year. The 42 dividend-themed ETFs that we follow raked in $16 billion in flows, nearly a third of every dollar going into equity ETFs, despite the fact that they make up just 5% by count of the 812 equity ETFs available. With the dividend yield on the S&P 500 Index at 2.1%, well above the 1.7% yield on the Barclays Aggregate Bond Index, who could blame investors for looking to equities? But be cautious when hunting for yield, particularly when moving up the risk ladder from bonds to stocks. Over the past five years, the average dividend ETF has had a volatility of 23%, more than 6 times greater than the 3.6% volatility of the Barclays Aggregate over that same time period. The highest-yielding stocks are more volatile than stocks in general, so dividend ETF investors should consider the stock-selection process employed by the fund. One ETF that gets it right is  Schwab U.S. Dividend Equity ETF (SCHD), one of the most successful ETF launches of the past year. While we like the approach of this fund, the valuations in some defensive sectors have become stretched. In addition, investors often pile into popular funds at the wrong time, as my colleague Adam Zoll outlines here.

Schwab U.S. Dividend Equity ETF is a suitable core holding for investors that want a focus on dividend-paying stocks and are comfortable with the large-value tilt this fund provides. This ETF holds 100 stocks that meet various criteria, including 10 years of consistently paying a dividend and a high composite score on a four-factor model of financial strength. Perhaps most important, it follows an adjusted market- cap-weighting approach, which results in a tilt toward large-value companies. Because of this tilt, investors should be aware of how this portfolio might overlap with existing portfolio holdings.

Michael Rawson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.

We’d like to share more about how we work and what drives our day-to-day business.

We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.

How we use your information depends on the product and service that you use and your relationship with us. We may use it to:

  • Verify your identity, personalize the content you receive, or create and administer your account.
  • Provide specific products and services to you, such as portfolio management or data aggregation.
  • Develop and improve features of our offerings.
  • Gear advertisements and other marketing efforts towards your interests.

To learn more about how we handle and protect your data, visit our privacy center.

Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.

To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.

Read our editorial policy to learn more about our process.