Should You Forget Picking Individual Stocks and Buy This Index Fund Instead?

Picking stocks at random isn't really a thing for investors who buy individual stocks. It is more like finding a few attractive needles in a haystack. That takes a lot of effort. And then you have to monitor your portfolio to ensure that none of the businesses you own go sideways in some way. That's a lot of effort, too.

If you are a dividend lover, Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) could be your index-based solution to getting out from under all of that work. Here's why.

What does Schwab U.S. Dividend Equity ETF do?

From a big picture perspective, Schwab U.S. Dividend Equity ETF likely does what you would do if you invested in individual dividend stocks. Essentially, the index it follows seeks to identify well-run companies that are growing, have rising dividends, and offer attractive dividend yields. That is, at its core, what most dividend investors are trying to do. To be fair, with 100 stocks in the index, the yield could be lower than you would like. But at 3.2%, it is more than three times the yield of the S&P 500 index (SNPINDEX: ^GSPC). That's hard to complain about, especially if you are getting that yield without putting in much effort.

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The hard part is really just getting to know what Schwab U.S. Dividend Equity ETF does. But that only requires a little legwork. From the homepage of Schwab U.S. Dividend Equity ETF, you'll find that it tracks the Dow Jones U.S. Dividend 100 Index. The homepage is a bit vague about what the index does, so you have to look up the methodology of the Dow Jones U.S. Dividend 100 Index, too.

When you do that, you'll find it starts by considering only companies that have increased their dividends for at least a decade. That's a pretty typical screen for dividend investors. From there, it creates a composite score that includes cash flow-to-total-debt, return on equity, dividend yield, and a company's five-year dividend growth rate. Basically, the score covers financial strength, how well a company is run, dividend growth, and yield, all of which are likely to be what a dividend investor would consider, too.

The 100 companies with the highest composite scores are included in the index, with market cap weighting. And you get all of that for a tiny expense ratio of 0.06%.

Ongoing portfolio management comes with the package

So Schwab U.S. Dividend Equity ETF is buying the types of stocks that dividend investors are likely to buy. But the story doesn't end there, because it rebalances the portfolio annually, ensuring that the list of 100 top dividend stocks is constantly being updated. Once you understand how the Dow Jones U.S. Dividend 100 Index is operated, it turns Schwab U.S. Dividend Equity ETF into a set-it-and-forget-it type of investment.

You'll probably want to check in with the ETF on a yearly or even quarterly basis, just in case, but that is a far cry from the daily grind of owning individual stocks. If you are ready to step back from all the work that goes into dividend investing, Schwab U.S. Dividend Equity ETF's 3.2% yield is probably looking pretty enticing right now.

Reuben Gregg Brewer 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.