The Schwab U.S. Dividend Equity ETF Has Surged Over 12% in 2026. Its 3 Top Holdings Have Been Major Contributors to Its Rally.

The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) has a very simple strategy. It invests in 100 of the best high-yielding dividend growth stocks. These companies provide the fund's investors with a nice blend of income and growth, which has historically enabled it to deliver strong average annual total returns.

This year, the fund is already up more than 12%, meaningfully outperforming the 3% slump in the S&P 500. The robust returns of its top three holdings -- Lockheed Martin (NYSE: LMT), ConocoPhillips (NYSE: COP), and Chevron (NYSE: CVX) -- are a major factor driving the dividend ETF's strong returns this year.

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Passively picking the top dividend stocks

The Schwab U.S. Dividend Equity ETF is a passively managed fund. Its strategy is to track the performance of the Dow Jones U.S. Dividend 100 Index. That index screens companies based on several dividend quality characteristics, including yield, five-year dividend growth rate, and financial strength.

The index reconstitutes its 100 holdings once a year (late March), jettisoning companies that no longer pass its screens, while adding those that do. Last March, the index added ConocoPhillips at a 4% weighting, putting it in the top 10 alongside holdovers Lockheed Martin and Chevron. It added the oil and gas giant due to its compelling yield (over 3% at the time) and strong five-year dividend growth rate (ConocoPhillips has delivered double-digit annualized dividend growth over the last five years).

Cashing in on the oil boom without even trying

ConocoPhillips was one of five energy stocks the index added last year, which boosted its exposure to the energy sector from 12.2% to 21%. It did so not because of an expectation that energy prices would increase, but because the sector boasted some of the highest-quality, high-yielding dividend stocks at the time. For example, Chevron has increased its dividend for 39 years in a row. The oil giant, which still yields over 3.5% after this year's rally, has grown its payout at a 6% annualized rate over the last five years, above the S&P 500's 5% annualized dividend growth rate.

The addition of ConocoPhillips and other energy stocks initially worked against the fund last year. The Schwab U.S. Dividend Equity ETF gained only 0.4% last year, significantly underperforming the S&P 500's more than 16% rally. The fund's lackluster performance was due in part to the tepid returns of its oil stock holdings as crude prices slumped in 2025. For example, ConocoPhillips lost more than 5% of its value last year.

However, this year has been a different story. Shares of both ConocoPhillips and Chevron are up more than 30% year-to-date. That's due to the surge in crude prices caused by the escalating conflict with Iran. As the ETF's second- and third-largest holdings (with 4.7% weightings to both oil stocks), their rally has been a major contributor in driving the fund's high-octane return this year.

A battle-tested dividend

The fund's top holding, Lockheed Martin, with a 4.9% weighting, has also contributed significantly to its rally this year. The defense giant's stock has risen 33.5% this year amid expectations that the war with Iran will drive a boost in defense spending.

The Schwab U.S. Dividend Equity ETF didn't make Lockheed Martin its top holding because of a high conviction in future defense spending. Instead, it was all about the quality of its dividend. Lockheed Martin pays a high-yielding dividend (2.1% after its share price rally, which is still well above the S&P 500's 1.2%). The company also has a strong track record of increasing its dividend. Lockheed Martin hiked its dividend by another 5% in October, extending its streak to 23 years in a row. The defense contractor's excellent combination of yield, growth, and financial strength gave it a high ranking in the Dow Jones Dividend 100 Index, which is why it had a high weighting in this ETF.

Investing in quality dividend stocks is a winning strategy

The Schwab U.S. Dividend Equity ETF has gotten a big boost from Lockheed Martin, Chevron, and ConocoPhillips this year. It had high allocations to these companies because they're such high-quality dividend stocks. The fund's focus on high-quality dividend stocks should continue to pay off long after the war ends, as these stocks have historically delivered some of the highest total returns over the long term.

Matt DiLallo has positions in Chevron, ConocoPhillips, and Schwab U.S. Dividend Equity ETF. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends ConocoPhillips and Lockheed Martin. The Motley Fool has a disclosure policy.