Passive income investors seeking a consistent stream of dividend income from a large, diverse exchange-traded fund should consider the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD).
The ETF provides passive income investors with a solid dividend yield, strong diversification across multiple sectors, and good long-term performance that compares favorably to the broadly diversified S&P500 stock index.
The Schwab U.S. Dividend Equity ETF, in my opinion, is a great way for income-oriented investors to invest because it reduces investment complexity and provides cost-effective access to a U.S.-focused dividend stock portfolio.
Investment Focus And Diversification
The Schwab U.S. Dividend Equity ETF simplifies dividend investing for both novice and experienced investors. In a nutshell, the Schwab U.S. Dividend Equity ETF gives passive income investors access to a broadly diversified portfolio of high dividend yielding stocks issued by U.S. corporations, and it tracks the Dow Jones U.S. Dividend 100TM Index.
Passive income investors can purchase a portfolio of dividend stocks with a proven history of dividend pay-outs and dividend growth with a relatively small amount of investment capital. The portfolio of the ETF consists primarily of large-cap, well-known U.S. companies, many of which have paid dividends for years or decades. The ETF manages $44.6 billion in assets and has been in the market for more than a decade (inception date: 10/20/11).
Broadcom Inc. (AVGO) is the ETF's largest portfolio holding, accounting for approximately 4.4% of the portfolio. Other notable portfolio companies include Verizon Communications Inc. (VZ), Cisco Systems Inc. (CSCO), and The Coca-Cola Company (KO). As of December 31, 2022, the top ten holdings of the Schwab U.S. Dividend Equity ETF account for 40.7% of all investments.
The exchange-traded fund is also well-diversified in terms of industries, with dividend-paying stocks from a wide range of industries included. Information technology (21.0%), Financials (20.4%), Consumer Staples (14.0%), Healthcare (11.9%), and Industrials (11.8%) have the highest representations in the ETF's investment portfolio.
A Cost-Efficient Way To Generate Recurring Income
Aside from diversification, another significant advantage of investing in the Schwab U.S. Dividend Equity ETF is cost-efficiency. The exchange-traded fund has a highly competitive effective expense ratio of 0.06%, especially when compared to the expense ratios of some mutual funds, which frequently charge investors 1% or more in annual management fees.
Investing in the Schwab U.S. Dividend Equity ETF allows investors to own a portion of a broadly diversified investment portfolio at a fraction of the cost of owning a similar portfolio through a mutual fund structure.
Compelling Performance Relative To The S&P 500
The Schwab U.S. Dividend Equity ETF has a strong long-term track record. The net asset value of the fund has increased at an annualized rate of 13.73%, which is 350 basis points higher than the average dividend exchange-traded fund over the same time period.
Furthermore, when compared to the S&P500, the Schwab U.S. Dividend Equity ETF performs well. In the last five years, the ETF has returned 45.77%, while the S&P500 has returned 47.37%.
The consistent net asset value performance of the Schwab U.S. Dividend Equity ETF has placed it in the top quartile of dividend-focused exchange-traded funds, according to Morningstar.
Attractive P/E-Ratio
The ETF is currently valued at a P/E ratio of 15x, indicating that it is neither undervalued nor significantly overvalued. The net asset value premium is currently at a 0.04% premium to net asset value, which, in my opinion, also makes the ETF fairly valued.
Criticism Of SCHD And Risks Related To The ETF
The Schwab U.S. Dividend Equity ETF is a U.S.-focused exchange-traded fund, which means it does not invest in emerging markets. This means that the ETF is solely exposed to the stock market in the United States, excluding passive income investors from potentially better investment performance in dividend stocks in non-U.S. markets.
When investing in SCHD, investors outside the United States must consider currency risk, which means that a depreciation of the U.S. dollar may result in investment returns that are lower than the fund's stated investment returns in U.S. dollars.
My Conclusion
The Schwab U.S. Dividend Equity ETF, in my opinion, is a very compelling investment choice for passive income investors because it provides a simple and cost-effective way for them to invest in a broadly diversified portfolio of dividend-paying stocks.
The ETF has strong sector diversification, but its sole focus on the United States may be viewed as a disadvantage.
The dividend yield of 3.4% is appealing, and as the fund's constituents increase dividend payments, the Schwab U.S. Dividend Equity ETF may see dividend growth in the future.
On the Pulse
A financial researcher and avid investor with a keen eye for innovation and disruption, as well as growth buy-outs and value stocks. Keeping an eye on the pace of high tech and early growth companies, I write about current events and the biggest news surrounding the industry, and strive to provide readers with ample research and investment opportunities.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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