Several exchange-traded funds (ETFs) focus on dividend-paying stocks. Some concentrate on high-yielding stocks while others focus on dividend growers.
The Schwab U.S. Dividend Equity ETF (SCHD 0.61%) provides investors with exposure to the best of both worlds. That's one of the many factors that make it the best dividend ETF to buy with $1,000 right now.
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The best 100 dividend stocks in one fund
The Schwab U.S. Dividend Equity ETF invests in 100 of the best high-yielding dividend growth stocks. Its investment strategy is to track the Dow Jones U.S. Dividend 100 Index, which measures the performance of 100 top high-yielding dividend stocks. The index screens companies based on several dividend quality characteristics, including dividend yield, five-year dividend growth rate, and financial strength.
As a result, the fund holds financially strong companies that pay above-average dividends that they're growing at healthy rates. The Schwab U.S. Dividend Equity ETF currently offers a yield of 3.5% based on its distribution payments over the last 12 months. That's nearly three times higher than the S&P 500's dividend yield (1.2%). For perspective, $1,000 invested in the fund would generate about $35 in dividend income each year, compared to only $12 from the same investment in an S&P 500 index fund. Meanwhile, its average holding has grown its payout at a more than 8% annualized rate over the last five years. That's faster than the S&P 500's dividend growth rate of 5% during that time frame.
NYSEMKT: SCHD
Key Data Points
The fund's current top holding is defense giant Lockheed Martin (LMT +0.56%), which accounts for 4.9% of its assets. Lockheed Martin has increased its dividend for 23 consecutive years, including by 5% last October. The defense contractor currently has a 2.1% yield, nearly double that of the S&P 500. The company backs its payout with a strong financial profile, including robust cash flows and an A-rated balance sheet. With defense spending likely to continue rising, Lockheed Martin's dividend should follow. The fund also boasts higher-yielding stocks like Verizon (5.5% yield) and those delivering faster dividend growth (ConocoPhillips hiked its payout by 8% last year and aims to deliver dividend growth within the top 25% of S&P 500 companies).
NYSE: LMT
Key Data Points
Strong performance
The Schwab U.S. Dividend Equity ETF's focus on companies that pay growing dividends has paid off for investors over the years. The fund has steadily increased its quarterly income distribution payment as the underlying holdings grow their dividends:
SCHD Dividend data by YCharts
As a result, it enables investors to collect a growing stream of dividend income.
That growing income stream has been a major factor driving the fund's strong total returns over the years. It has delivered a double-digit average annual total return in the last one-, five-, and 10-year periods as well as since its inception in 2011 (12.9%). That aligns with the historically strong performance of dividend growth stocks.
The best dividend ETF
The Schwab U.S. Dividend Equity ETF stands out for its dual focus on dividend yield and growth. That strategy has enabled the fund to deliver a meaningful, growing passive income stream to investors and strong total returns. Given the historical returns of dividend growers, the fund should continue delivering above-average income and appreciation to investors.
