This Top Dividend ETF Just Lowered Its Payment. Should Income Investors Be Concerned?

The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is one of the largest and most popular exchange-traded funds (ETFs) focused on dividend-paying stocks. It currently manages over $95 billion in assets for investors seeking a high-yielding, steadily rising stream of dividend income.

The top ETF recently declared its latest dividend payment, which is down from both last quarter and the year-ago period. Here's a look at whether this lower payment level should concern income investors.

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A little lighter this quarter

The Schwab U.S. Dividend Equity ETF declared its latest dividend this week, payable to investors early next week. The payment will be $0.2525 per share. That's down from $0.2569 last quarter (-1.7%) and $0.2604 compared to the year-ago payment (-3%). This decline might seem like a bit of a head scratcher to some investors, given that dividend growth is one of the four quality characteristics the index it tracks uses to screen dividend stocks. For example, at the index's last annual reconstitution of its holdings in late March, when it added 25 new holdings while deleting 22 existing ones, the reconstituted holdings had delivered an average five-year dividend growth rate of 9.4%. That's faster than the 8.6% average five-year dividend growth rate of its holdings before the annual reconstitution.

Investors should keep two things in mind here. First, SCHD doesn't pay a fixed quarterly dividend. Instead, it collects the dividends received from its holdings and distributes the income to investors once a quarter. As a result, timing plays a role in its quarterly payment. One factor that could have thrown off the timing is the annual reconstitution. While the post-reconstituted holdings had a very similar average dividend yield to the prior holdings (3.43% compared to 3.45%), the new holdings have different dividend payment dates. As such, the quarterly payment decrease is likely due to the timing of SCHD's receipt of dividends from its holdings.

Focus on the yearly income, not the quarterly payment

What's most important to investors is the fund's annual dividend income. Over the last 12 months, investors have received $1.048 per share in dividend income, up 2.2% from the prior year. Meanwhile, here's a look at its annual dividend growth over the last five years:

Data source: Schwab and the author's calculations.

As the table shows, the dividend growth rate can fluctuate significantly from year to year. However, SCHD has delivered an average annual dividend growth rate of 9.3% over the past five years.

That steady upward annual climb should continue. The fund's current holdings include many companies with elite dividend growth records. For example, four of its top ten holdings are Dividend Kings (companies with 50 or more years of annual dividend increases). Meanwhile, many other holdings have increased their dividends annually for over a decade.

SCHD is still a top-notch dividend ETF

While the Schwab U.S. Dividend Equity ETF's latest dividend payment is down, that doesn't mean the fund is failing investors. The drop is likely due to timing following its annual reconstitution. Its payment is still up over the past year, and has grown steadily over the last five years. Given its focus on high-yielding dividend-growth stocks, it should continue to deliver higher income each year.

Matt DiLallo has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.