Dividend investors understand the importance of diversification. You wouldn't want to depend on only a few companies for your income because it can be a disaster if something happens to those stocks. That's why exchange-traded funds (ETFs) are such valuable tools.
The Schwab U.S. Dividend Equity ETF (SCHD 0.07%) might be the most popular dividend ETF. It helps investors easily diversify their portfolios and has delivered a mix of income and share-price appreciation over the years.
Recently, the Dow Jones U.S. Dividend 100, the market index that the Schwab U.S. Dividend Equity ETF follows, underwent its annual reconstitution. It's an excellent opportunity for investors to check out the ETF's new look. Is now a good time to buy? Here is what you need to know.
The ETF's new distribution yield is massive
The Schwab U.S. Dividend Equity ETF pays a quarterly distribution. Investors received the fund's most recent distribution on March 31, $0.2488 per share. On an annualized basis, it amounts to about a 4% dividend yield, the ETF's highest outside of the COVID market crash in 2020.
It's a massive win for investors who want immediate investment income. This doesn't guarantee that future distributions will be as generous. The ETF's trailing-12-month yield is closer to 3.5%. Still, history is on your side. The fund has significantly upped its distributions over time:
SCHD Dividend data by YCharts.
It's not always in a straight line, but the long-term trend jumps off the page. Even though the fund focuses on blue chip dividend stocks (generally mature companies that lack fast-paced growth), the ETF's most recent distribution represents over 500% growth since the fund was launched.
A new look, but the ETF's core investing themes remain the same
The Schwab U.S. Dividend Equity ETF looks quite different than just a few weeks ago. The shake-up following the Dow Jones U.S. Dividend 100 index's annual reconstitution saw about 19.2% portfolio turnover. It removed 17 existing holdings in favor of 20 new additions.
Despite the changes, the index and the Schwab ETF still abide by the same core themes. Technology exposure remains minimal at just 8.7% compared to the sector's 30.2% weight in the S&P 500 index. The Schwab ETF is more diverse, with sizable weightings in financials (18.7%), healthcare (16.7%), consumer staples (14.4%), industrials (13.3%), and energy (11.7%), among others. Today, the ETF's top holdings include:
| Ranking | Company Name | Weighting (of the ETF's assets) |
|---|---|---|
| 1. | Coca-Cola | 4.47% |
| 2. | Verizon Communications | 4.43% |
| 3. | Lockheed Martin | 4.29% |
| 4. | Altria Group | 4.19% |
| 5. | ConocoPhillips | 4.15% |
| 6. | PepsiCo | 4.15% |
| 7. | Home Depot | 4.05% |
| 8. | Chevron | 3.96% |
| 9. | Amgen | 3.93% |
| 10. | Cisco Systems | 3.92% |
Source: The Schwab U.S. Dividend Equity ETF prospectus.
The ETF has 103 holdings, but these 10 account for over 41% of the fund's assets. The notable eliminations (weights of 1% or more) included Pfizer, BlackRock, U.S. Bancorp, and M&T Bank, while the notable additions were ConocoPhillips, Merck, Schlumberger, Target, and General Mills.
Following the reconstitution, the Schwab U.S. Dividend Equity ETF is weighted more heavily in energy, consumer staples, and materials, at the expense of every sector except real estate. Financials saw the steepest decline.
Is this Schwab ETF a buy now?
The recent volatility throughout the U.S. stock market didn't spare the Schwab ETF. The fund has fallen over 9% since the start of April, nearly double the S&P 500's decline. This could be a fantastic dip to buy, and here's why.
The starting 4% annualized distribution yield is a whopper and gives investors immediate and meaningful income. Some investors evaluate stocks based on their historical yields. In that light, the Schwab U.S. Dividend Equity ETF's abnormally large distribution yield makes it a table-pounding buy for that reason alone.
And the ETF's cumulative price-to-earnings ratio (P/E) is 17.7 today, a solid price to pay for what you're getting. The fund features high-quality dividend stocks that grow earnings and raise their dividends faster than inflation in most cases. The top stocks have betas under 1.0. Therefore, the ETF should hold up relatively well in a prolonged market decline.
Although the Schwab U.S. Dividend Equity ETF might not deliver high-paced growth, the safety, peace of mind, and growing distributions are valuable in today's volatile market.
