What's more important for retirees: a portfolio of stocks that delivers capital appreciation or consistent and growing income?
A 2021 study by Dimensional Fund Advisors, a firm with $915 billion in assets under management, sought to answer this question. Running 100,000 simulations, the analysts examined how growth-focused portfolios, income-focused portfolios, and portfolios split 50-50 might perform under environments of lower equity returns, higher inflation, and falling interest rates.
The results were striking. The fund evaluated each portfolio allocation strategy based on the probability that a retiree might run out of assets at age 85 or 95. Income-focused accounts were extremely resilient with only a 0.1% failure rate by age 85 in scenarios of high inflation or low equity returns, compared to failure rates north of 30% for growth-focused accounts. In the authors' words, the findings suggest that, "while not bulletproof, an income-focused allocation offers strong risk management even under adverse economic conditions."
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It's just one study, but there is clear value in a portfolio delivering enough income to meet your expenses, year after year. Such stability allows someone to worry less about what's going on with the stock market or interest rates.
And that's what makes the Schwab U.S. Dividend Equity ETF (SCHD +0.04%) so interesting.
103 stocks selected for dividend strength
Launched in Oct. 2011, the Schwab U.S. Dividend Equity ETF's official objective is "to track, as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Dividend 100 Index."
The Dow Jones U.S. Dividend 100 Index, in turn, tracks the returns of high-yielding dividend stocks that have a record of consistent payouts and have been "selected for fundamental strength relative to their peers."
Despite its name, the Dow Jones U.S. Dividend 100 Index actually includes 103 stocks. It doesn't include real estate investment trusts, master limited partnerships, or preferred stocks, so the Schwab U.S. Dividend Equity ETF doesn't, either. But that still leaves plenty of high-yield companies in the portfolio.
All told, the Schwab U.S. Dividend Equity ETF sports a dividend yield of 3.8% as of this writing, more than triple the yield of the S&P 500.
NYSEMKT: SCHD
Key Data Points
Even more importantly, its top five holdings all have track records of solid dividend growth and fundamentals that suggest they can continue ramping up dividends in the years ahead.
A look at Schwab U.S. Dividend Equity ETF's top holdings
The Dow Jones U.S. Dividend 100 Index has a rule that no single stock can account for more than 5% of its composition. Therefore, that's the case with the Schwab U.S. Dividend Equity ETF, too. Its largest holding, Cisco Systems (CSCO +3.14%), comprises 4.43% of the portfolio.
Cisco has 14 years of dividend increases under its belt, and in addition to paying out $1.6 billion to shareholders in dividends last quarter, the tech company also spent $1.3 billion buying back shares. Stock buybacks make dividends more sustainable by reducing the number of shares in circulation, thereby reducing the company's dividend obligation (and boosting earnings per share at the same time). Cisco stock yields 2.2%, which is well above the 1.2% yield of the S&P 500.
Next up is AbbVie (ABBV +3.58%), the Chicago-based biotech with a 3.2% dividend yield. This company has raised its dividend for 54 consecutive years, including a 5.5% hike announced recently. Only a tiny fraction of public companies manage to become Dividend Kings with at least 50 straight years of dividend increases under their belts, so management will fight to keep this distinction. AbbVie makes up 4.42% of the fund's portfolio.
Another biotech, Amgen (AMGN 0.66%), comprises 4.23% of the portfolio. It yields 3.2%, has raised its dividend for 14 years now, and its 5.7% dividend increase in 2025 was well over inflation. Its payout ratio of just 44% also gives it considerable breathing room to continue increasing payouts going forward.
The ETF's fourth-biggest holding, Merck (MRK +0.53%), announced a 5.2% dividend hike over the summer, also for its 14th consecutive annual increase. And its fifth-largest holding, Lockheed Martin (LMT +0.02%), has 23 years of payout increases under its belt. The defense giant has a dividend yield of 3.1% and comprises 4.15% of the portfolio.
One possible worry for investors
You may have noticed that three of the top five holdings are in biotech. Overexposure to any one sector is a risk retirees should avoid. Fortunately, the fund has rules limiting weightings to no more than 25% for any sector. In fact, its largest sector weighting is energy at 19.3%, followed by 18.5% for consumer staples.
However, since its 2011 inception, the Schwab U.S. Dividend Equity ETF has underperformed the S&P 500 with an annualized total return of 12.2%, compared to the latter's 15.2%.
As any long-term investor knows, that gap will add up significantly over time, but the fund's performance since 2011 is still enough to turn every $10,000 invested into $51,000 and change. And in today's tech-dominated rally, the fund's rules enforcing diversification may be hurting performance in the short term. Of course, tech's dominance won't last forever, and in the next sector rotation, it may well be the Schwab ETF's turn to shine.
In the meantime, its price-to-earnings ratio of just 17 makes it substantially cheaper than the S&P 500 with its P/E ratio of 31. And the fund's low expense ratio of just 0.06% ensures that fees won't be a significant drag on returns, in contrast to many actively managed funds.
For investors seeking greater protection through value investing, growing income, and respectable capital appreciation, the Schwab U.S. Dividend Equity ETF is a buy.