The war has fueled a massive spike in crude oil prices. Brent, the global benchmark price, has surged 70% this year, topping $100 a barrel. That rally has driven up most energy stocks.
The rally in oil stocks has benefited the Schwab U.S. Dividend Equity ETF (SCHD +0.10%), which had a high energy allocation at the start of this year. The top dividend ETF has gained over 10%, significantly outpacing the S&P 500's decline of more than 5%. However, despite getting an oil-fueled boost this year, the fund recently cut its exposure to energy stocks. Here's a look at why it made that move.
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Reshuffling the decks
The Schwab U.S. Dividend Equity ETF is a passively managed fund that tracks an index of top high-yield dividend stocks (the Dow Jones U.S. 100 Dividend Index). That index reconstitutes once a year to ensure it holds the 100 best high-yielding dividend stocks. It recently completed its annual reshuffling, deleting 22 existing stocks and adding 25 new ones. As a result, the Schwab U.S. Dividend Equity ETF sold the deleted stocks and bought the new additions.
The fund had the highest allocation to the energy sector before the annual reconstitution at 23.5% of its holdings. That high allocation to energy stocks helped boost the fund's returns this year as oil prices soared. However, that's down to 16.3% post-reconstitution, making energy stocks its third-highest sector weighting.
NYSEMKT: SCHD
Key Data Points
Saying goodbye
The Schwab U.S. Dividend Equity ETF is exiting three energy holdings:
- Valero Energy: The refining stock had a 2.7% weighting before the reconstitution and currently has a 1.9% yield.
- Haliburton: The oilfield services company had a 1.3% weighting, and its dividend yield is currently 1.7%
- Ovintiv: The oil and gas producer had a 0.5% weighting and a dividend yield of 1.9%.
Those yields are lower than the fund's average of 3.4% over the last 12 months. They've also been delivering slower dividend growth in recent years. Valero has only increased its payout by 22.5% over the last five years, while Ovintiv hasn't hiked its dividend since early 2023, and Halliburton hasn't raised its dividend since early 2024.
One new addition plus strength at the top
The Schwab U.S. Dividend Equity ETF also added one oil dividend stock this time around: Devon Energy (DVN +3.33%). The oil and gas company will initially have a 0.8% allocation. However, that will rise once Devon completes its merger with Coterra Energy, which has a 0.7% allocation in the fund. Devon currently has a 1.8% dividend yield. However, it plans to increase its quarterly dividend by 31% to $0.315 per share following the merger, which should close in the second quarter, boosting its yield to 2.4%. Devon has nearly tripled its dividend over the past five years.
NYSE: DVN
Key Data Points
While the Schwab U.S. Dividend Equity ETF is reducing its overall exposure to the energy sector, it maintains a meaningful allocation to the sector. Further, the fund's top two holdings are oil giants Chevron (CVX +0.18%) and ConocoPhillips (COP +1.95%).
Chevron leads the way at a 4.6% allocation. It's a sector leader in paying dividends. The oil company recently extended its growth streak to 39 consecutive years and has grown its payout at a 6% annualized rate over the last five years. Chevron currently has a dividend yield of 3.4%. The company expects to grow its free cash flow at a more than 10% annual rate through 2030 at $70 oil, giving it plenty of fuel to continue increasing its dividend.
NYSE: CVX
Key Data Points
Meanwhile, ConocoPhillips has a 4.3% allocation. The oil company has grown its payout for more than a decade. ConocoPhillips has nearly doubled its dividend over the last five years and currently yields 2.4%. It currently plans to deliver dividend growth within the top 25% of S&P 500 companies. The oil company expects to double its free cash flow by 2029 at $70 oil to support its rapidly rising dividend.
It still has plenty of fuel
The Schwab U.S. Dividend Equity ETF has reduced its exposure to the energy sector following its annual reconstitution. However, the fund still has a meaningful allocation to the sector, including its two largest holdings. Add in the high-octane dividend growth Devon will provide, and the fund should have plenty of fuel to continue generating strong total returns for investors.
