For most investors, simple is good. The Schwab US Dividend Equity ETF (SCHD 0.11%) is a simple way to invest in reliable, high-quality dividend stocks. After all, if you have a life to live, you probably don’t want to spend all your free time poring over stocks.
A roughly 4% yield and a unique stock selection process seal the deal when it comes to this smart investment choice. Here’s what you need to know today.
What has the Schwab US Dividend Equity ETF done?
Before getting into the Schwab US Dividend Equity ETF’s investment approach, it’s important to get a good feel for what it has achieved. Many dividend investors are looking to create a reliable income stream to live on in retirement.
So the goal is to own investments that produce reliable and hopefully growing dividends. Of course, a secondary hope is that the investment’s value will rise as well, producing some capital appreciation.
The chart above shows that dividend investors have gotten exactly what they wanted from this exchange-traded fund (ETF). The current dividend yield of roughly 4% is in line with a “rule of thumb” retirement withdrawal rate that has led many dividend investors to focus on creating a 4% yield from their portfolios.
So, with that 4% yield, investors won’t feel the need to touch the principal invested in the Schwab US Dividend Equity ETF. That can help with a feeling of financial security, or provide confidence that there will be money left to hand on to loved ones someday.
All that comes from one simple investment with a tiny expense ratio of 0.06%. To be fair, the Schwab US Dividend Equity ETF has not performed as well as an S&P 500 index ETF on a total return basis. But that’s not the goal of the ETF. The goal is to provide a reliable income stream with some capital appreciation, and it does that very well.
Image source: Getty Images.
Don’t buy the Schwab US Dividend Equity ETF until you read this
You shouldn’t buy any pooled investment just because of a few performance statistics. Just as with any other ETF or mutual fund, you are giving your hard-earned money to the Schwab US Dividend Equity ETF to manage on your behalf. You need to make sure you understand what is being done with that cash.
In reality, the Schwab US Dividend Equity ETF is just tracking the Dow Jones U.S. Dividend 100 Index. What you really need to know is what that index does, which is actually fairly complex. First, it pulls out all the companies that have increased their dividends for at least 10 consecutive years. Then real estate investment trusts (REITs) are eliminated from consideration. This forms the starting pool from which the index is created.
But the 100 stocks that make it into the index haven’t been selected yet. The next step is to create a composite score for all of the stocks that pass the first round of screening. The score looks at cash flow to total debt, return on equity, dividend yield, and the company’s five-year dividend growth rate. The 100 stocks with the highest composite scores are included in the index and are market-cap weighted.
SCHD Dividend Yield data by YCharts.
There’s a lot going on there, but the point is that the Schwab US Dividend Equity ETF is focused on owning well-run and financially strong businesses that have attractive yields and strong histories of dividend growth. That’s likely the same type of stock a dividend investor is trying to find.
Buying the Schwab US Dividend Equity ETF gets you an entire portfolio of such investments with just one buying decision. That’s simple, and it allows you to spend your time doing other things, like spending time with family or playing golf.
Smart investors look for simple solutions that work
The Schwab US Dividend Equity ETF isn’t going to give you everything an investor dreams of, but no investment can do so. What it will do is provide you with an attractive income stream and, if history is any guide, slow and steady growth of capital over time. If that’s your goal, it would be a smart choice to invest in the Schwab US Dividend Equity ETF today.
