ETFs
Morningstar calls SCHD the “gold standard” for dividend funds. here’s why
When it comes to dividend funds, the Schwab US Dividend Equity ETF is “the gold standard,” according to Morningstar. The fund, which trades under the symbol SCHD and has a 30-day SEC yield of 3.84%, is among the best performers in its peer group, said Ryan Jackson, manager research analyst for passive strategies at Morningstar. It’s also “super cheap” with an expense ratio of 0.06%. “You see the benefit of low expenses compound over the long term, and that’s really where this fund has thrived,” he said. Five-year performance of the SCHD 5Y mountain Schwab US Dividend Equity ETF From SCHD’s inception in 2011 through May 2024, its annualized return of 12.9% beat the Russell 1000 Value’s 11.5% and was at the trails the Russell 1000 by 14.4%, Jackson said. This places him in the ninth percentile of the high-value peer group. “This is a portfolio of very high quality stable stocks,” he said. “These won’t outperform all bull markets – that’s not how it was designed. It has resisted market downturns. It remained competitive during market recoveries. That’s the benefit of threading the needle between value and quality. Here are his top 10 titles. The exchange-traded fund seeks to track the total return of the Dow Jones US Dividend 100 Index. Although it is considered a passive fund, there is an active strategy within the index. Therefore, it is not like its peers who track a broad market index, Jackson pointed out. In fact, Schwab played a role in designing the index’s methodology, said DJ Tierney, senior investment portfolio strategist at Schwab Asset Management. The first step in this methodology is to look at companies that have paid dividends for 10 consecutive years, excluding real estate investment trusts. They are then graded according to the yield indicated and the bottom half is removed. “We want to focus on companies that pay dividends and pay substantial dividends,” Tierney said. The index then applies four screens, or measurements. First, it looks at the company’s fundamentals and ranks them based on cash flow relative to total debt. It also looks at the return on equity, dividend yield and dividend growth rate over the past five years. Each measure is weighted equally and the title is noted. Once the values are selected, the market capitalization of the index weights them, with a maximum position around 4%. There is also a sector cap of 25%, Tierney said. The end result is that companies have healthy balance sheets and pay dividends. “It’s pretty straightforward and we think the transparency and simplicity of it is a really good thing for investors,” Morningstar’s Jackson said. “This index does a remarkable job of balancing yield and high quality.”