A new year is here, and investors should probably be taking a quick look at their portfolios just to make sure they are still on track with their plans. If this kind of annual review feels daunting, don’t be down on yourself. Investing is hard work.
Dividend investors can make it a little easier in 2025 if they add the Schwab US Dividend Equity ETF (SCHD 0.33%) to the mix. Here’s why this exchange-traded fund (ETF) could be a great pick for you in 2025.
What does the Schwab US Dividend Equity ETF do?
The exchange-traded fund universe has changed dramatically in recent years. It can probably be broken down into three broad groups: Actively managed ETFs, index-based ETFs, and esoteric ETFs (meaning that they take an aggressive, and often highly specific, investment approach). It’s more important now than ever before to make sure you understand what the ETFs you own are actually doing.
The Schwab US Dividend Equity ETF’s index-based approach may seem a little complex at first, but quite easy to understand when you dig into it.
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For starters, the Schwab US Dividend Equity ETF tracks the Dow Jones U.S. Dividend 100 Index. So you need to know what the Dow Jones U.S. Dividend 100 does. It starts out by looking only at companies that have increased their dividends for at least 10 years. It then pulls out real estate investment trusts (REITs). Since REITs are intended to pay large dividends, including them would likely lead to a vast overrepresentation of REITs.
From this point, a composite score is created that includes cash flow to total debt, return on equity, dividend yield, and a company’s five-year dividend growth rate. These metrics cover a lot of ground. Cash flow to total debt provides a view of a company’s financial strength. Return on equity examines the strength of a business. Dividend yield and the five-year dividend growth rate are ways to look at the attractiveness of a stock for dividend-focused investors.
The composite scores that come out of this process are ranked from highest to lowest, and the 100 highest-scoring companies are included in the ETF’s portfolio. A market cap weighting methodology is used to allot cash among the stocks in the portfolio, which will lead to the largest companies having the greatest effect on overall performance.
This is what dividend investors will want in 2025 and beyond
There’s a lot going on at the Schwab US Dividend Equity ETF. It is traversing a lot of ground. But all of it makes logical sense, and the screens it performs are likely the same types of things that a dividend investor would do with their own portfolio. Add in annual rebalancing of the portfolio, and the package is complete.
Here, you are getting an ETF that focuses on high-quality, growing businesses that offer investors attractive yields and growing dividends. The one caveat is the dividend yield, which is currently around 3.3%. You can find other dividend-focused ETFs with higher yields.
However, the methodology of higher-yielding ETFs often doesn’t take much more than yield into consideration. The Schwab US Dividend Equity ETF is providing a healthy mix of yield and quality, and the 3.3% yield is much higher than the 1.2% on offer from the S&P 500 Index.
This ETF is a “set it and forget it” type of investment
Would it be better if the Schwab US Dividend Equity ETF had a higher yield? Sure, but then investors would probably have to sacrifice on the quality side of the story — and, thus, take on more risk. Don’t forget that the market is still near all-time highs, too, so erring on the side of quality is probably the right approach to take right now.
While you should always keep an eye on your portfolio, this ETF’s approach makes logical sense, and it should let you sleep well at night even when the market gets turbulent. Check on it once or twice a year, and you should end up just fine over the long term.
