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ETF Specialist

Quality Pays Dividends With This ETF

Schwab U.S. Dividend Equity stands out from the crowd with its rock-bottom expense ratio and emphasis on sustainable income.

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Suitability
The enduring popularity of dividend-strategy funds means exchange-traded funds like  Schwab U.S. Dividend Equity ETF (SCHD) are competing in one of the most crowded areas of the industry. Schwab recently cut this relatively young fund's expense ratio to 0.07%, making it the cheapest dividend ETF available. Its price isn't the only thing that recommends it, however. This dividend-focused ETF targets stable stocks that pay moderate, sustainable income. The resulting portfolio is one of the most quality-oriented among dividend ETFs, with almost all holdings earning either a wide or narrow Morningstar Economic Moat Rating. SCHD's portfolio also has high projected earnings growth relative to competitors and a conservative payout ratio of under 50%. We think this fund is an appropriate core holding for most investors, even in the face of rising interest-rate concerns.

Strategy
Dividend-strategy ETFs can take very different approaches. SCHD tracks the Dow Jones U.S. Dividend 100 Index, which selects 100 stocks after screening for strong fundamentals, high dividend yields, and a long track record of dividend continuity. The index starts with the 2,500 largest United States companies by market cap, excluding REITs, master limited partnerships, preferred stock, and convertibles. The stocks are then screened for size and liquidity, and only companies that have paid dividends in the past 10 consecutive years are allowed. Once a firm skips a distribution, the clock resets. The remaining stocks are put in order by annual dividend yield, and the bottom half are cut.

Abby Woodham does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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