Quality Dividends On The Cheap With This ETF

Many market observers speculating that the Federal Reserve could raise interest rates multiple times this year following just one increase in each of the past two years. Couple that with some investors theorizing 3 percent Treasury yields would spell doom for the bond bull market, high dividend stocks and exchange-traded funds could come under pressure.

There are plenty of ETFs that, while focusing on payout strategies, do not emphasize high dividend names and/or defensive, rate-sensitive sectors. That group includes the Schwab Strategic Trust SCHD.

The ETF And Her Index

The $4.9 billion SCHD tracks the Dow Jones Dividend 100 Index, which along with a quality mandates that constituent firms have a dividend increase streak of at least 10 years. As highlighted by top 10 holdings such as Johnson & Johnson JNJ, Procter & Gamble Co PG and The Coca-Cola Co KO, many of SCHD's 114 holdings have payout increase streaks spanning much longer than 10 years.

A Quiet Entrance

Still, SCHD has not set the world on fire since coming to market in 2011.

“Since its inception in October 2011, SCHD has managed to keep pace with its average peer in the large-value category. The fund's middling performance over this span can be largely attributed to the fact that high-quality stocks have lagged both the broader market as well as higher-beta, lesser-quality firms,” said Morningstar in a recent note.

With a focus on dividend consistency and growth, it is not surprising that SCHD's largest sector weight is consumer staples at over a quarter of the ETF's weight.

Talk About A Tech Allocation!

However, SCHD also has one of the largest allocations to technology stocks among all dividend ETFs at nearly 21.5 percent. That is notable for multiple reasons, including tech's dividend ascent over the past few years and the sector's stout cash piles, which should ensure dividend growth going forward.

“Relative to its large-cap dividend-oriented peers, this fund will likely generate an income stream that is more stable and that should grow with time. This is reflective of the methodology of its underlying benchmark, which specifically targets high-quality, steady dividend payers, and is not--as some of competing funds' benchmarks are — tuned to isolate constituents exclusively on the basis of high current and/or prospective payouts or yields,” according to Morningstar.

With an annual expense ratio of 0.07 percent, or $7 per $10,000 invested, SCHD is the least expensive dividend ETF on the market. Yes, even less expensive than its Vanguard equivalents.

Disclosure: Todd Shriber owns shares of Johnson & Johnson.