The Schwab U.S. Dividend Equity ETF (SCHD -0.63%) is a popular exchange-traded fund (ETF) among dividend investors. It holds 100 of the highest-quality dividend stocks and tracks an index (Dow Jones U.S. Dividend 100 Index) that screens companies based on the quality of their dividends.
Because of that, this ETF can be a great tool for investors to use to find top-notch dividend stocks to add to their income portfolio. Currently, the Schwab U.S. Dividend Equity ETF’s top two holdings are oil giants ConocoPhillips (COP -0.46%) and Chevron (CVX -0.34%). Here’s a closer look at this fund and why it loves those two leading oil stocks.
A leading dividend ETF
The Schwab U.S. Dividend ETF is one of the top dividend ETFs. With over $70 billion in assets under management (AUM), it’s the second-largest ETF focused specifically on dividend stocks.
A big reason so many investors have poured their money into this ETF is its focus on dividend quality. The ETF tracks the Dow Jones U.S. Dividend 100 Index, which aims to measure the performance of high-yielding dividend stocks with records of consistently paying dividends. It also selects companies based on the strength of their financial profiles compared to their peers.
The fund reconstitutes its holdings annually, ensuring it holds the top 100 dividend stocks by the quality of their payouts. It recently jettisoned 23 stocks and replaced them with 23 companies with even higher-quality payouts. In addition, the fund adjusted its allocations. As a result, the ETF’s top two holdings are currently ConocoPhillips (4.6% of its assets) and Chevron (4.4%).
Investors seeking to generate dividend income could simply buy this ETF. They’d gain exposure to 100 top dividend stocks with a very attractive combined dividend yield of 3.7% based on the fund’s latest dividend payment. That’s well above the S&P 500‘s dividend yield (1.3%). Alternatively, investors could cherry-pick holdings out of the fund to add to their existing portfolio of dividend payers.
High-octane dividend stocks
Chevron and ConocoPhillips certainly stand out for their ability to pay dividends.
Chevron is an elite dividend stock. The oil giant has increased its dividend payment for 38 straight years. Over the past five years, the company has grown its dividend faster than the S&P 500 and nearly double the rate of its closest peer. Meanwhile, the company offers an attractive yield of 4.1%.
Chevron should have no trouble continuing to increase its dividend in the future. The oil company expects to add $10 billion to its annual free cash flow by 2026, fueled by high-margin production growth and cost-cutting initiatives. For perspective, last year, Chevron produced $15 billion in free cash flow and paid $11.8 billion in dividends. Its surging free cash flow, which doesn’t factor in closing its highly accretive acquisition of Hess, should give it plenty of fuel to continue growing its high-yielding dividend at an above-average rate.
ConocoPhillips doesn’t have Chevron’s dividend growth track record. However, the oil producer has increased its payment every year since resetting the payout in 2016 following a deep oil market downturn. It has been delivering accelerated dividend growth in recent years (11% in 2022, 14% in 2023, and 34% in 2024). These raises have pushed its dividend yield up to more than 3%.
The oil producer’s target is to deliver dividend growth in the top 25% of companies in the S&P 500 in the future. Fueling that plan are the impact of accretive acquisitions (it bought Marathon Oil last year), its high-return investment strategy, and its meaningful share repurchase program.
Great dividend stocks to buy
It’s easy to see why Chevron and ConocoPhillips are the top two holdings of the dividend-focused Schwab U.S. Dividend Equity ETF. They pay high-yielding dividends that they’ve increased at above-average rates in recent years. With more dividend growth ahead, they’re great stocks to buy for a growing stream of dividend income. Chevron is best for those seeking a higher-yielding payout, while ConocoPhillips is better for those seeking higher-octane dividend growth.
Matt DiLallo has positions in Chevron and ConocoPhillips. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.
