Monopoly dividends

The Schwab US Dividend Equity ETF (SCHD) has been a pillar of my investing portfolio.  At a very high level, it’s a low-cost ETF that invests in quality, dividend paying (and growing) companies.  I own it in both my retirement account as well as my taxable account.  There are numerous reasons why I own it and will continue to add to it.  In fact, I am preparing to add more over the next week prior to the upcoming dividend payment.

Introduction

SCHD tracks an underlying index, the Dow Jones US Dividend 100 Index.  In fact, this is what keeps ETF fees low, they are not actively managed but follow the index that they have chosen to.

From the Dow Jones itself,

The Dow Jones U.S. Dividend 100 Index is designed to measure the performance of high-dividend-yielding stocks in the U.S. with a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios.

What the index does versus peers is that not only does it select high dividend yielding companies, but it also screens them based on financial metrics.  This is the key for me, it is not blindly buying companies that offer dividends.

Methodology

I’ll try to keep this fairly high level, the white paper for the full methodology is here.

  1. Start with the 2,500 largest US stocks, exluding REITs
  2. Meet bare requirements for market cap and liquidity
  3. Minimum 10 years of dividend payments
  4. Stocks that pass, rank by dividend yield descendingly (highest to lowest)

Now from there, the remaining stocks pass through quality filters to only pick the biggest and best available.

  1. Cash flow to total debt
  2. Return on equity
  3. Indicated dividend yield
  4. Five year dividend growth rate

Those scores are equal weighted and then the 100 highest stocks from that list would make up the index.  There are a few caveats then still to provide some buffering.  Things like, stocks will remain in the index as long as they were in the top 200 score.  There are also limits on weightings (this is a cap weighted index) both on individual companies and allocations to sectors.  For individual stocks it’s 4.5% and no industry can represent more than 25% of the index.  The index is rebalanced twice a year.  Turnover is lower than many other funds, it’s listed as 13% as of 1/31/2018 on the Schwab site.

Holdings

Here’s the current list of the top 25 holdings.  You can see that for example, Intel, Microsoft and Boeing are all over the 4.5% limit due to their actual stock performance.

Notes

Due to the index construction, you may have noticed companies like Apple and Starbucks being missing!  This is by design, they do not have the necessary 10 year dividend history.  It’s important to know how the indices are constructed in order to round out a good dividend growth portfolio.  I own both of these as individual holdings.

I do want to note this is a 5 star fund from Morningstar.

The ETF pays quarterly, generally near the tail end of a month.  In fact you can get ex-dividend alerts from my site Custom Stock Alerts.  This is actually on my dividend alert screen right now:

Fees and Performance

Anytime an investment product is mentioned perhaps the most important thing to discuss is the fee associated with it.  Fortunately, SCHD is among the lowest cost ETFs available, especially in the dividend focused universe.  With an expense ratio of just 7 basis points (0.07% annually), this fund is essentially free to own.  Bonus points, it’s commission free to trade in a Schwab account (which I use for my taxable account).

For it’s history, the fund closely matches the performance of the S&P 500 though it has a higher yield tilt to it.  Currently the yield is approximately 2.5% versus 1.8% on the S&P.

Conclusion

The Schwab US Dividend Equity ETF is a great product for investors who prefer as passive route for either part or all of their portfolio.  It focuses on high quality, dividend paying companies and sports incredibly low portfolio turnover and fees.  The yield is also about 40% higher than the vanilla S&P 500 so it’s a good choice for retirees or anyone that focuses more on a stream of dividend income.

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