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Morningstar names this ETF the ‘gold standard’ for dividend funds. Here’s the reason why.



When it comes to dividend funds, one that stands out as the gold standard is the Schwab U.S. Dividend Equity ETF, according to Morningstar. Trading under the ticker SCHD, this fund boasts a 30-day SEC yield of 3.84% and is considered one of the top performers in its peer group. Ryan Jackson, manager research analyst for passive strategies at Morningstar, praises the fund for being super cheap with an expense ratio of just 0.06%. He highlights how the low expenses can compound over the long term, leading to the fund’s success.

Since its inception in 2011 through May 2024, the SCHD has delivered an impressive 12.9% annualized return, outperforming the Russell 1000 Value’s 11.5% but trailing behind the Russell 1000’s 14.4%. Jackson notes that the fund ranks in the ninth percentile of the large-value peer group and attributes its success to holding a high-quality portfolio of stable stocks. While these stocks may not outperform every bull market, they have proven to weather market downturns while staying competitive during market rallies. This ability to balance value and quality is key to the fund’s success.

The Schwab U.S. Dividend Equity ETF seeks to track the total return of the Dow Jones U.S. Dividend 100 Index. Despite being considered a passive fund, there is an active strategy within the index, distinguishing it from its peers that track broad market indexes. D.J. Tierney, senior investment portfolio strategist at Schwab Asset Management, explains that the index methodology was designed with input from Schwab. Companies that have paid a dividend for 10 straight years, excluding real estate investment trusts, are ranked by indicated yield, with the bottom half removed. The index then applies four screens, including fundamentals like cash flow versus total debt, return on equity, dividend yield, and dividend growth rate over the last five years.

After selecting stocks based on these criteria, the index market cap weights them, with a maximum position of around 4% and a sector cap of 25%. The result is a portfolio of firms with healthy balance sheets that pay a dividend. Jackson praises the transparency and simplicity of the index, highlighting its ability to balance yield with high quality. It offers investors a straightforward way to gain exposure to dividend-paying companies with strong fundamentals. Overall, the Schwab U.S. Dividend Equity ETF is lauded for its consistency and performance within its peer group.

In conclusion, the Schwab U.S. Dividend Equity ETF is a standout option for investors seeking exposure to dividend-paying stocks with strong fundamentals. With an impressive track record of performance and a low expense ratio, the fund has earned its reputation as the gold standard in the dividend fund space. By carefully selecting companies based on stringent criteria and market cap weighting, the fund aims to deliver stable returns while balancing yield and quality. Investors looking for a reliable and transparent dividend fund may find the SCHD to be an attractive option for their portfolios.

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