Why Schwab U.S. Dividend Equity ETF Is One of the Best Dividend Funds Available

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Why Schwab U.S. Dividend Equity ETF Is One of the Best Dividend Funds Available

The Schwab U.S. Dividend Equity ETF (SCHD) is highly regarded for its prudent, transparent, and risk-aware investment approach, making it a top choice for investors seeking reliable dividend income. Here’s why SCHD stands out among dividend funds.

Key Morningstar Metrics for Schwab U.S. Dividend Equity ETF
  • Morningstar Medalist Rating: Gold
  • Process Pillar: High
  • People Pillar: Above Average
  • Parent Pillar: Above Average

SCHD tracks the Dow Jones U.S. Dividend 100 Index, which includes 100 companies that have consistently paid dividends for at least a decade and have the financial strength to continue doing so. Prominent names like Coca-Cola (KO) and Home Depot (HD) are top holdings, showcasing the fund's focus on stability and quality.

Solid Downside Protection

The fund’s emphasis on dividend-oriented firms with robust balance sheets provides a defensive posture, helping it weather market volatility better than many of its peers. This defensive stance is evident in the fund's performance during market downturns, where it has shown resilience.

Quality Factor Exposure

SCHD’s strict stock-selection criteria emphasize the quality factor, historically associated with market outperformance. By prioritizing companies with high return on invested capital and strong financial health, SCHD consistently beats the Russell 1000 Value Index in profitability metrics. As of March 2024, nearly 65% of SCHD’s portfolio comprised stocks with wide Morningstar Economic Moat Ratings.

Efficient Market-Cap Weighting

Stocks in SCHD are weighted by market cap, reflecting the market’s collective assessment of each stock’s value. This approach helps mitigate the impact of riskier, high-yielding stocks and ensures diversification by capping individual stock weightings at 4% and sector weightings at 25%.

Low Turnover and Costs

Index buffers help reduce turnover and transaction costs, maintaining efficiency. While this may occasionally mean retaining less optimal constituents, the lower trading costs are a worthwhile trade-off. SCHD’s rock-bottom fee further enhances its appeal as an economical investment option.

Performance Highlights

SCHD’s performance has been robust, especially during market drawdowns. Since its inception in October 2011 through February 2024, SCHD’s Sharpe ratio—a measure of risk-adjusted performance—ranked in the top decile among large-value peers. Despite facing challenges in recent years, SCHD’s long-term returns have been impressive, outperforming the Russell 1000 Value Index by about 1.6 percentage points annualized.

Conclusion

With its blend of quality exposure, defensive positioning, and cost efficiency, the Schwab U.S. Dividend Equity ETF (SCHD) is a stellar choice for dividend-focused investors. Its solid track record and sensible investment strategy make it one of the best dividend funds available.