There's a lot to like about dividend stocks. While their main draw may be the income streams they provide, those payouts are not the only thing they offer to investors. Companies that pay dividends have, as a class, historically delivered market-beating total returns. The average dividend payer in the S&P 500 has delivered a 9.2% average annual total return over the last 50 years, according to Hartford Funds and Ned Davis Research. That compares to a 7.7% average annual total return for an equal-weighted S&P 500 index.
However, not all dividend stocks are equal. The best returns have come from companies that have been able to both sustain and regularly grow their payouts. Such businesses are the focus of the Schwab U.S. Dividend Equity ETF (SCHD 0.07%). Its strategy has enabled the exchange-traded fund to grow its investors' assets impressively. Had a person invested $10,000 in the ETF at its inception in October 2011 and consistently reinvested their dividends, their holding would be worth about $42,000 today. Here's a closer look at this top-notch dividend-focused ETF.
NYSEMKT: SCHD
Key Data Points
A high-quality dividend investment
The Schwab U.S. Dividend Equity ETF is a passively managed fund. It tracks the Dow Jones U.S. Dividend 100 index, which measures the performance of roughly 100 high-yielding dividend stocks with records of consistently paying dividends. The index also zeroes in on those with peer-leading financial metrics.
As such, the ETF offers an easy way to invest in a diversified portfolio of high-quality, high-yielding dividend payers for a very low cost. Its expense ratio is a meager 0.06%. Because of that, investors receive nearly all the dividend income generated by the stocks the ETF holds -- as well as the share price appreciation, of course. At its current share price, the ETF has a 3.9% dividend yield based on payments over the past 12 months. That's more than double the S&P 500's current yield of about 1.5%.
The fund's focus on holding high-quality, high-yielding dividend stocks has paid off over the years. It has delivered a 12.1% annualized total return since its inception (and 10.2% over the past decade).
High-quality dividend stocks
The fund held a diversified portfolio of 104 stocks at the end of September. By sector, the largest shares of its assets were in industrials (17.7%), healthcare (16.6%), and financials (15.1%). Its holdings tend to be larger-cap companies (the weighted average market cap was $142.7 billion) that traded at relatively cheap valuations (an average price-to-earnings ratio of 14.4, compared to 20.4 for the S&P 500). Their lower valuations have contributed to their higher dividend yields.
The ETF's top five holdings at the end of September were:
- Verizon: The telecom giant accounted for 4.4% of the fund's holdings. The company has increased its payouts for 17 straight years, the longest streak in the U.S. telecom sector. It gave investors a 1.9% raise in 2023. Verizon's dividend currently yields 6.9%, which is one of the highest in the S&P 500.
- Amgen: The biotechnology company accounted for 4.4% of the value of its portfolio. It has increased its payout every year since it initiated a dividend in 2011, including a 10% hike in late 2022. Amgen currently yields 3.2%.
- Broadcom: The semiconductor giant accounted for 4.2% of the ETF's holdings. It has increased its dividend every year since it initiated a payout in its 2011 fiscal year, including a 12% bump in late 2022. Its payout currently yields 2%.
- Coca-Cola: The beverage company was 4% of its portfolio. It has increased its dividend for 61 straight years, more than qualifying it as a Dividend King (a company with 50 or more consecutive years of dividend increases). Coca-Cola last raised its payout in February by 4.6%. It currently yields 3.1%.
- Home Depot: The home improvement retailer made up 4% of the ETF's total holdings. It has increased its dividend every year since 2010, including by 10% in early 2023. Its payout currently yields 2.6%.
The largest holdings of the Schwab U.S. Dividend Equity ETF all sport above-average yields, and have long track records of increasing their payouts regularly. Such growth should continue in the future, given the ETF's focus on companies with strong financial profiles.
An easy way to add some income to your portfolio
The Schwab U.S. Dividend Equity ETF is a high-quality option for income-seeking investors. It holds around 100 companies that pay dividends with above-average yields -- payouts that they can be expected to sustain and grow in the future. That makes it a great ETF to buy for those who want to collect steadily rising streams of passive income.
