Do you need an income engine that you know will last at least 20 years? A basket of quality dividend stocks -- in the form of an exchange-traded fund, or ETF -- is your best bet, since it will automatically adjust its portfolio to hold the most qualified names at any given time.
And right now, the Schwab U.S. Dividend Equity ETF (SCHD +0.39%) is the best bet among the market's most popular dividend ETFs. Here's why.
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This dividend ETF is built differently
Don't misunderstand. The Vanguard Dividend Appreciation ETF (VIG +0.52%) and the iShares Core Dividend Growth ETF (DGRO +0.46%) are still solid options. Each currently brings one liability to the table, though. That's their poor balance.
The iShares fund is currently 21% financial stocks and nearly 18% healthcare stocks at a time when both industries could be running into a secular headwind. Meanwhile, more than 26% of Vanguard's Dividend Appreciation ETF is made up of technology stocks, with Broadcom, Apple, and Microsoft collectively accounting for nearly half of that 26%. Blame the rapid proliferation of artificial intelligence, which has pumped up a small handful of tech names into very big companies. And although VIG's holdings are all proven dividend payers -- and growers -- the trailing yield of 1.5% isn't much. This is as much a growth fund as an income fund.
NYSEMKT: SCHD
Key Data Points
Schwab's U.S. Dividend Equity ETF, however, is just built differently.
Meant to mirror the Dow Jones U.S. Dividend 100™ Index, this fund doesn't allow any single holding to make up more than 4% of its total value, rebalancing on a quarterly basis as needed; steps are also taken to prevent sector-based imbalances.
More than anything, the Dow Jones U.S. Dividend 100 Index's inclusion rules specifically prioritize higher yields and strong fundamental value. In addition to a stock's five-year dividend growth rate and yield, the index scores prospective constituents on cash flow and return on equity, ranking each eligible ticker relative to its peers.
The end result? SCHD's top holdings right now include fairly equal-sized positions in Coca-Cola, Merck, Chevron, and Procter & Gamble. These are stocks with proven dividend pedigrees in businesses with a predictable future. All of their products or services will still be in demand in 20 years, whereas the technology, healthcare, or financial landscape could change in unexpected ways between now and then.
Best of all, you'd be plugging into an attractive yield of 3.3%.
Not the norm, but the current reality all the same
The disparity between these three popular dividend funds isn't always this wide. This is an unusual environment, though. We're seeing a game-changing technology explode right before our eyes, while growing cost-based challenges to the healthcare industry are finally coming to a head. The money industry may be headed for a regulatory overhaul as well.
But the Schwab U.S. Dividend Equity ETF's different design allows it to better protect its investors from these secular unknowns than VIG and DGRO do, simply because it's got more exposure to the economy's stalwart sectors. And right now, that's a pretty important edge for long-term investors.
