Is the Schwab U.S. Dividend Equity ETF (SCHD) the Only Stock You Need to Buy?

By Rich Duprey Published Mar 25, 9:14AM EDT

24/7 Wall St. Insights:

Exchange-traded funds (ETFs) are an easy, low-cost way to instantly diversify your portfolio across companies, sectors, and geographies.
The Schwab U.S. Dividend Equity ETF (SCHD) owns about 100 stocks that are selected for their financial strength and quality, as well as their history of raising dividends for shareholders.
Because its portfolio owns the best and fastest-growing dividend payers, SCHD might be the only stock you need to buy.

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Is the Schwab U.S. Dividend Equity ETF (SCHD) the Only Stock You Need to Buy? — © gopixa / Shutterstock.com

The stock market has been a wild roller coaster ride for the past five years, shifting from bull market to bear and back numerous times. It was a good lesson that stocks don’t just rise in a straight line higher, and volatility can wreak havoc on your portfolio.

Yet you don’t have to buy individual stocks to profit in the stock market. Exchange-traded funds (ETFs) provide investors with access to a basket of stocks that instantly diversify a portfolio across companies of different sizes, in various industries, and across geographical locations.

One of the best ETFs you can buy is the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD | SCHD Price Prediction), a portfolio of the biggest, dividend-paying stocks that tracks the total return of the Dow Jones U.S. Dividend 100 Index. Since inception, SCHD has steadily increased its dividend payment and has a total return of 410%. The dividend pays a higher than average yield, currently at 3.5% annually.

The ETF just underwent its annual reconstitution, which means it adjusted its holdings to meet its criteria for inclusion in its portfolio.

Separating the wheat from the chaff

Before we get into what the Schwab U.S. Dividend Equity ETF actually owns, it’s important to know the criteria it uses to select stocks to buy.

Using the Dow Jones U.S. Broad Stock Market Index, the largest 2,500 stocks listed on the market (but excluding real estate investment trusts), it looks for the following:

At least 10 years of consecutive dividend payments
A minimum market capitalization of $500 million
Three-month average daily trading volume of $2 million

SCHD then ranks the stocks by their dividend yield and only the top 50% are then most closely examined. It ranks them once more based on free cash flow-to-debt, return on equity, their annual dividend yield, and the compound annual growth rate of their dividend. It then chooses the top 100 stocks in the list.

By limiting their stocks to the top ones that meet their criteria, investors are sure to receive the highest quality, dividend-paying stocks. The ETF is doing all the hard work for you at low cost (just 0.06% annual expense fee), and presenting you with a list that is the cream of the crop.

Counting the winners and losers

There was a lot of movement in the Schwab U.S. Dividend Equity ETF with this year’s reconstitution. There were 20 new stocks added to the portfolio and 17 companies were kicked out.

What’s interesting about the companies that were added is that most are down sharply over the past year, while many of those that were removed were up by large percentages. Among those that were booted were Pfizer (NYSE:PFE), down 5% over the last 12 months; BlackRock (NYSE:BLK), up 19%, and Tapestry (NYSE:TPR), up 64%.

On the other side — the additions — there were Merck (NYSE:MRK), down 26%; Halliburton (NYSE:HAL), down 35%; and Target (NYSE:TGT), down 39%.

Although the average yield of the stocks added to the portfolio is slightly lower (4.75%) than of those that were removed (5%), the five-year dividend growth per share of the additions was over 33% versus 20% growth of the removals. You are getting stocks that are growing their dividends faster than the ones you are losing.

The leaders of the pack

With the Schwab U.S. Dividend Equity ETF only allow a stock to occupy about 4% of the total portfolio (and its sector 25% of the total), the top five holdings are:

ConocoPhillips (NYSE:COP), 4.53% of the portfolio
Chevron (NYSE:CVX), 4.31%
Bristol Myers Squibb (NYSE:BMY), 4.02%
Verizon (NYSE:VZ), 4.01%
Amgen (NASDAQ:AMGN), 3.92%

These are all top dividend-paying stocks with long histories of rewarding shareholders by growing their payouts.

Key takeaway

The Schwab U.S. Dividend Equity ETF was created in 2011 and has raised its dividend by an average of nearly 11% annually for the past decade. It is scheduled to announce its new quarterly dividend tomorrow (it fluctuates quarter-to-quarter), but buying now ensures you will own the best dividend stocks on the market, all in one place.

Although any of the individual stocks could go down, as seen above, by spreading out the risk over 100 stocks, you insulate yourself from extreme volatility. SCHD could be the only stock you need to buy, ever.

About the Author Rich Duprey →

After two decades of patrolling the dark corners of suburbia as a police officer, Rich Duprey hung up his badge and gun to begin writing full time about stocks and investing. For the past 20 years he’s been cruising the markets looking for companies to lock up as long-term holdings in a portfolio while writing extensively on the broad sectors of consumer goods, technology, and industrials. Because his experience isn’t from the typical financial analyst track, Rich is able to break down complex topics into understandable and useful action points for the average investor. His writings have appeared on The Motley Fool, InvestorPlace, Yahoo! Finance, and Money Morning. He has been interviewed for both U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, and USA Today.