Why Schwab U.S. Dividend Equity ETF Is One of the Best Dividend Funds Available

Key Morningstar Metrics for Schwab U.S. Dividend Equity ETF

• Morningstar Medalist Rating: Gold
• Process Pillar: High
• People Pillar: Above Average
• Parent Pillar: Above Average

Schwab U.S. Dividend Equity ETF SCHD stands out for its sensible, transparent, and risk-conscious approach that should continue to generate better long-term risk-adjusted returns than the Russell 1000 Value Index.

The Dow Jones U.S. Dividend 100 Index underpinning this fund admits 100 stocks that have paid dividends for at least 10 consecutive years and boast the financial health to extend that streak. Industry fixtures like Coca-Cola KO and Home Depot HD meet those requirements and sit atop the portfolio. Dividend-oriented firms with healthy balance sheets tend to be more insulated from market movements than highflyers or low-quality competitors, so this fund normally strikes a defensive stance.

Strict stock-selection criteria give this fund potent exposure to the quality factor, which has historically been tied to market-beating returns. The fund comfortably and consistently beats the Russell 1000 Value Index in profitability metrics like return on invested capital. Entering March 2024, nearly 65% of the portfolio represented stocks with wide Morningstar Economic Moat Ratings, a higher share than 96% of Morningstar Category peers. Quality doesn’t come cheap, but focusing on the higher-yielding half of the market and tilting toward mature franchises land the fund in the large-value category.

Stocks that make the cut are weighted by market cap, an efficient approach that channels the market’s collective view of each stock’s relative value. It also muffles the impact of riskier, higher-yielding holdings because stock weightings rise and fall alongside valuations. The fund limits each stock’s weighting to 4% of the portfolio and each sector to 25%. Concentration can bubble up in lean portfolios like this one, so these measures help the fund stay diversified.

Index buffers effectively mitigate turnover and the associated transaction costs. The index may retain current constituents over more deserving candidates, but the lower trading costs make this a worthy trade-off. A rock-bottom fee makes the fund a very cheap all-around offering.

Schwab U.S. Dividend Equity ETF: Performance Highlights

Defensive by design, this fund has shown grit during market drawdowns but remained competitive during most rallies. That combination helped its Sharpe ratio (a measure of risk-adjusted performance) rank within the top decile of large-value peers from its October 2011 inception through February 2024. And despite recent difficulties, its total returns have measured up well, too: It beat the Russell 1000 Value Index by about 1.6 percentage points annualized over the same span.

This exchange-traded fund captured just 87% of the Russell 1000 Value’s downside since inception, with lower volatility. The mature stocks that constitute SCHD tend to absorb market shocks better than most. For instance, wide-moat pharmaceutical holdings Merck MRK and Amgen AMGN excelled as the broad market pulled back in 2022. That duo helped the fund outstrip its category index by about 4 percentage points on the year despite a sector composition that worked against it.

On the flip side, the fund captured 90% of the category index’s upside over its lifetime—a predictable trade-off. Its smooth disposition hurt most during the 2023 market rally when the fund lagged the Russell 1000 Value Index by about 7 percentage points and trailed nearly 90% of its peers. Unlike the category benchmark, the fund did not receive superb contributions from the likes of Meta Platforms META, Salesforce CRM, and Advanced Micro Devices AMD—guests in the value index that checked in just a few months prior. Instead, weak returns from wide-moat fixtures like United Parcel Service UPS, Lockheed Martin LMT, and PepsiCo PEP weighed on the portfolio.

The bad year left but a small blemish on the fund’s overall track record. From inception through February 2024, its risk-adjusted and absolute returns remained within the top 10% of the large-value cohort. However, the differentiated fund’s recent woes reinforce that strikeouts will likely punctuate its home runs.