The Schwab U.S. Dividend Equity ETF (SCHD +0.78%) is one of the most popular dividend exchange-traded funds (ETFs) you can buy. But this fairly complicated product can also help investors who prefer to buy individual stocks, which is a function of the screening process used.
Targeting well-run companies that have high yields, the Schwab U.S. Dividend Equity ETF's recent rebalancing suggests that energy stocks could be a place for dividend investors to focus on today. Here are three top options from the ETF's portfolio.
What does the Schwab U.S. Dividend Equity ETF do?
The 100 stocks within the Schwab U.S. Dividend Equity ETF go through a fairly strict screening process. First, only companies that have increased their dividends for at least 10 consecutive years are looked at. (Real estate investment trusts are removed from consideration.) Then a composite score is created for the remaining stocks.
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The score includes cash flow to total debt, return on equity, dividend yield, and a company's five-year dividend growth rate. The 100 companies with the highest scores are included in the ETF. Without getting too deep into each metric, the Schwab U.S. Dividend Equity ETF is attempting to focus on high-quality businesses that have both growth potential and attractive yields. This is basically what most dividend investors are trying to do when they pick stocks.
That makes the ETF's portfolio a great starting point for dividend investors. And right now, after the annual rebalancing of the portfolio, energy stocks appear to be an important focus. This sector makes up 21% of the ETF's assets, which is its largest sector weighting. If you haven't been looking at energy stocks, the Schwab U.S. Dividend Equity's portfolio suggests you should be. Its top three energy holdings are ConocoPhillips (COP 4.56%), Chevron (CVX 2.16%), and EOG Resources (EOG 4.21%). Here's a look at each one.
1. ConocoPhillips is a pure-play driller
ConocoPhillips has a dividend yield of 3.6%. The dividend has been increased annually for eight years. The annualized dividend growth rate over the past five years is an attractive 20%. That said, ConocoPhillips is down around 25% or so over the past 12 months, falling even more than the price of oil. That makes complete sense.
NYSE: COP
Key Data Points
ConocoPhillips is a pure-play energy producer. So the top and bottom lines of its income statement are entirely reliant on the price of the commodities it sells. The dividend has a history of being a little on the volatile side, too. And, in fact, it was cut in 2016 during the deep energy downturn at the time. Even if you have a particularly strong stomach and a positive outlook for oil, this is a more aggressive investment option.
2. Chevron is boring and reliable
Chevron has a dividend yield of about 5%. The company has increased its annual dividend for a huge 38 consecutive years. The average annualized dividend increase over the past five years was a slow and steady 6% or so. Chevron's stock is down 15% or so over the past year, slightly less than the drop in oil prices. Again, this more modest decline makes sense.
NYSE: CVX
Key Data Points
Chevron is an integrated energy company, which means that it produces oil, transports oil, and processes oil. Having exposure across the energy value chain helps to soften the industry's inherent ups and downs because each segment of the industry operates just a little differently.
On top of that, Chevron has a long history of operating in a conservative fashion, including making sparing use of leverage. That gives management the leeway to take on debt to support the business and dividend through energy downturns (that debt is repaid when oil prices recover). It is a good option for investors looking for energy exposure at just about any time, but the yield today makes it particularly attractive for conservative dividend lovers right now.
3. EOG Resources is another pure-play driller
EOG Resources has a dividend yield of roughly 3.7%. The dividend has been increased for eight years, and the average annualized increase over the past five years was 27%. The stock is down around 12% over the past year.
NYSE: EOG
Key Data Points
Like ConocoPhillips, EOG's top and bottom lines are largely driven by commodity prices. While the dividend rose quickly when oil prices were increasing, the price reversal in oil could have a negative impact on the dividend potential here. That said, the core dividend has been more resilient than ConocoPhillips' dividend.
Notably, EOG's debt-to-equity ratio is about half that of ConocoPhillips and roughly similar to that of Chevron. And EOG didn't cut its dividend in 2016, which suggests that investors looking for a pure-play driller will probably find EOG more attractive than ConocoPhillips. That said, Chevron still wins out for dividend consistency given its impressive streak of dividend increases.
Don't blindly follow, do your own research
Even with just a quick look at the Schwab U.S. Dividend Equity ETF's top energy holdings, it is clear that dividend investors need to do their homework when picking stocks. Even a helpful screening process like the one used by the ETF may not turn up stocks that fit with your investment approach. For example, while ConocoPhillips is a fine company, EOG has proven to be a more consistent dividend payer in the upstream (production) energy niche. But if you are conservative by nature, Chevron's reliable dividend and lofty yield will probably win out over either of the ETF's other top energy holdings.
