The market has kept grinding higher with big tech leading the way, and most portfolios have ended up leaning more heavily toward growth stocks as a result. While growth has enjoyed a particularly long stretch of outperformance, its streak won't last forever. In fact, during the 1980s and after the internet bubble burst, there were long periods when value stocks outperformed their growth counterparts.
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The markets move in cycles, and value stocks will eventually have their turn in the spotlight. This is why it could be time to give a fund like the Schwab U.S. Dividend Equity ETF (SCHD -0.33%) a second look. The exchange-traded fund (ETF) is built around stocks with consistent free cash flow and rising dividends, rather than companies chasing revenue growth. So while it isn't time to abandon growth stocks, mixing in a little value with the help of SCHD could be a good idea.
Investing in dividend stocks
SCHD holds about 100 companies that not only pay dividends but have proven they can keep raising them. It tracks the Dow Jones U.S. Dividend 100 Index, which screens for both a company's financial strength and dividend-paying track record, so you don't end up with the weaker names that sometimes sneak into yield-focused funds.
The fund adds and deletes stocks once a year and rebalances its portfolio quarterly. It screens for dividend quality using four metrics: cash flow to total debt, return on equity (ROE), forward dividend yield, and five-year dividend growth rate. The result is a portfolio of businesses with strong balance sheets and cash flows that can withstand downturns and still support and grow their payouts.
The ETF currently yields close to 4%, which is attractive whether you reinvest the dividends or take them as income. The fund's performance has also been stronger than most people realize with an annualized return of about 11.1% over the last decade. That puts it ahead of most other value-oriented funds during this period.
With an expense ratio of just 0.06%, almost all of those returns stay in your pocket, and that cost advantage matters more the longer you hold your position.
Why adding SCHD makes sense
Portfolios that are tilted toward tech and growth names don't always feel risky when the market is rising, but the concentration can be an issue if market dynamics shift. For its part, SCHD tilts more toward consumer staples, healthcare, and financials where the earnings streams tend to be steadier and management teams are more focused on returning cash to shareholders. You won't see the same explosive moves you get from tech stocks, but you get predictability, and over time, the steady growth of dividends can add up.
For retirees, SCHD is a nice ETF to own. It can provide a ballast in a turbulent market while also paying solid dividends to help supplement your income. However, that doesn't mean younger investors can't invest in SCHD, too. Reinvesting SCHD's dividends can create a powerful compounding effect, which can help build wealth over time. Pair that with a dollar-cost averaging strategy, and it can add some balance to a growth-heavy portfolio.
SCHD is the perfect kind of investment for dollar-cost averaging because it doesn't need babysitting. The index does all the work through its annual reconstitution, so you can sit back and focus on other things.
The bottom line
SCHD isn't going to make headlines the way a hot growth stock will, but it offers investors a mix of income and solid long-term performance. In a market where most portfolios are overweight growth, it provides diversification that will matter when the market inevitably turns.
It's not time to abandon growth ETFs, but remember this current cycle cannot last forever. SCHD is a great way to prepare your portfolio in the meantime.
