Everyone knows about the S&P 500 Index (^GSPC +0.44%), which is probably the most recognized market gauge in the world. But have you heard of the Dow Jones U.S. Dividend 100 Index? Probably not.
This is the index that sits behind the Schwab U.S. Dividend Equity ETF (SCHD 0.07%) and its attractive 3.5% dividend yield. Here's what that index does and why it makes this ETF so attractive if you have less than $500 to invest today.
What does the Dow Jones U.S. Dividend 100 Index do?
The Dow Jones U.S. Dividend 100 Index is focused on dividend stocks. But not just any dividend stocks. The first thing this index does as it looks to build a portfolio is throw out any stock that doesn't have at least 10 consecutive years of annual dividend increases.
That focuses the portfolio on companies that have proven they have a strong business, since weak businesses don't usually manage a feat like that. (The index also jettisons real estate investment trusts (REITs) because they would dominate the portfolio given that they are specifically structured to pay large dividends.)
Image source: Getty Images.
Some indexes would stop at that step, but not the Dow Jones U.S. Dividend 100 Index. It has another screen that limits the portfolio even further. It creates a composite score that includes cash flow to total debt, return on equity, dividend yield, and a company's five-year dividend growth rate.
Each of these factors has a purpose. Cash flow to total debt looks at financial strength. Return on equity is a gauge of company quality. Dividend yield is pretty clearly about the income an investor can expect to collect. And the five-year dividend growth rate is really a combination of things, but most importantly it helps to ensure that investors are buying companies that will reward them for sticking around.
The roughly 100 companies with the highest composite scores get into the index and are weighted by market cap. The list of holdings is updated annually, so the best candidates are always in the index. And investors get all of this work done for them for a tiny expense ratio of just 0.06%.
How do you buy into this index?
The only way to invest in this index is to buy shares of the Schwab U.S. Dividend Equity ETF. The ETF's shares trade for around $30 a share, so you can buy in for a relatively small sum. But what exactly are you getting, performance-wise? There's the roughly 3.5% dividend yield for starters, but that's just the beginning of the story.
Notice that the price of Schwab U.S. Dividend Equity ETF has trended higher over time. That means investors have seen their portfolios increase in value. To be fair, the ETF's dividend focus will likely leave it lagging behind the S&P 500 index's performance. But then, the S&P 500 index is only offering a 1.2% dividend yield. Most income investors probably wouldn't mind this trade-off.
Next, look at the dividend line. It has also moved higher over time, which makes sense since the increase in the value of the ETF means there's more capital to invest in dividend-paying stocks. Given the pass-through nature of ETFs, the dividend varies from quarter to quarter. But overall, dividend investors have not only seen their capital increase; they also have seen their income stream increase. That'll be a win/win for most dividend investors.
The best part of the story
If you are a dividend investor looking for a simple index to track so you can spend your time living life instead of following Wall Street, the Schwab U.S. Dividend Equity ETF is a great option. That's because the Dow Jones U.S. Dividend 100 Index basically does what you would likely be trying to do if you bought individual income stocks, investing in well-run and financially strong dividend-paying companies. That will likely make the Schwab U.S. Dividend Equity ETF a no-brainer investment for most dividend lovers.
