A Good Deal On A Dividend ETF

Exchange traded funds flows data continue confirming investors are fond of low-fee products. Over the past several years, the bulk of ETF flows have been directed to products with annual fees of 0.20 percent, or $20 on a $10,000 investment, or less.

In most cases, dividend ETFs carry larger annual fees than some standard broad market equity funds, but there are still plenty of low-cost dividend ETFs to consider. The Schwab U.S. Dividend Equity ETF SCHD is one of the cheapest.

What Happened

The $8.20 billion SCHD, which turns seven years old this month, has an annual fee of 0.07 percent. That's the equivalent of $7 on a $10,000 investment and enough to make SCHD one of the least expensive ETFs in the dividend category.

SCHD targets the Dow Jones U.S. Dividend 100 Index, which holds companies with a minimum dividend increase streak of a decade.

“The fund uses several tactics to avoid owning firms at higher risk of cutting their dividend payment,” said Morningstar in a note out Friday.“It only includes names that have consistently paid dividends during the past decade, considers profitability metrics to select its holdings, weights its holdings by market cap, and limits single-stock and sector bets. The profitability metrics and market-cap-weighting approach are evident in its portfolio composition.”

Why It's Important

It's often said “you get what you pay for,” but cheap in the world of ETFs is not conflated with under-performance. SCHD proves as much.

“From its inception in October 2011 through September 2018, the fund outpaced its average peer by 1.5% annualized with slightly less risk,” according to Morningstar. “The fund's low fee, favorable overweighting to the technology sector, and stock selection within the industrials sector contributed the most to its outperformance.”

SCHD's allocates about 39 percent of its combined weight to industrial and technology stocks. The fund's 17.23 percent technology weight is high among domestic dividend strategies.

What's Next

SCHD “mitigates this risk in several ways. First, it screens out stocks that haven't consistently made dividend payments for the trailing 10 years,” according to Morningstar. “This screen is backward-looking, so it doesn't guarantee that a stock will maintain its dividend payment, but it demonstrates a commitment of returning cash to shareholders.”

Morningstar has a Silver rating on SCHD.

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