No matter the market environment, investors should have a good dividend ETF in their portfolio for a number of reasons.
Among the biggest reasons is that dividend ETFs generally outperform in down markets, making them a near-perfect diversifier. They tend to outperform because they are composed of stable, established companies with lots of capital and cash flow that are able to consistently fund their dividends.
These are value-oriented or blue chip companies and market leaders that typically perform well in various market cycles. And the dividend can boost the total return when it's reinvested in the ETF.
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But now, with markets volatile and overvalued, it is an even more critical time to have the balance and stability of a good dividend ETF. And there really arenʻt many better than the Schwab U.S. Dividend ETF (SCHD 0.58%).
Built for high yields
The Schwab U.S. Dividend ETF has been an outstanding performer over the years. Year to date, it has returned about 19% with dividends reinvested, beating the return of the S&P 500. Over the past 12 months it has returned about 28%, and it has a 10-year average annualized return of 13%.
The ETF has a trailing-12-month distribution yield of 3.29%, which is about three times as high as the S&P 500 average yield. It also has a minuscule 0.06% expense ratio, so only a small fraction of the assets goes to annual fees.
NYSEMKT: SCHD
Key Data Points
The ETF tracks the Dow Jones U.S. Dividend 100 index, which includes high-yield stocks with at least 10 straight years of dividend payments and market caps of more than $500 million. The stocks are then weighted through various fundamental screens including cash flow to total debt, return on equity, dividend yield, and the five-year dividend growth rate.
It is constructed so that the high dividend yields come from solid, sturdy companies. Its top three holdings are Qualcomm, Texas Instruments, and UnitedHealth Group.
Time to buy
The Schwab U.S. Dividend ETF is pretty much always a buy, given its low expense ratio, track record of strong returns, and important role as a portfolio diversifier. But this is a particularly important time to diversify your portfolio given the volatile nature of the market. Stocks are overvalued, and if a correction follows, this ETF will likely provide a boost for your overall portfolio.
When the Nasdaq Composite had a correction in the first quarter, this ETF was up 12% through March 31. That is exactly the kind of downside protection this ETF gives you.
