Energy Stocks Comprise 17% of This Top Dividend ETF. Here's Why.

Investors evaluating passive exchange-traded funds (ETFs) can save themselves from headaches and negative surprises by taking just a few minutes to understand how an ETF's underlying index works.

That's especially true with dividend ETFs, including the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). A $96 billion behemoth, this ETF is the second-largest fund in its category and allocates 16.9% of its portfolio to energy stocks. The Schwab ETF's energy exposure is high compared to some competing ETFs and more than 5x the weight assigned to that sector by the S&P 500.

This ETF has significant energy exposure, but that's working for investors this year. Image source: Getty Images.

Of course, that works for investors when energy equities are rallying, as has been the case this year. This dividend ETF is up nearly 19% year to date, trouncing the S&P 500 and its larger, less energy-exposed rival in the process. That's good enough for some investors, but some inquiring minds want to know why this ETF leans heavily into the energy sector. Fortunately, it's easy to explain.

Methodology matters

The Schwab ETF, which turns 15 years old in October, tracks the Dow Jones U.S. Dividend 100 index. Understanding that gauge's "quirks" reveals why it currently features above-average energy exposure. The index is a collection of high-dividend domestic stocks sporting dividend consistency and "fundamental strength relative to their peers, based on financial ratios."

As measured by the S&P Energy Select Sector index, which yields 2.82%, the energy sector does, in fact, offer yields in excess of the broader market. That's one reason it looms large in this ETF.

Regarding dividend consistency, stocks making the cut for entry into this ETF must have at least a decade of uninterrupted dividend payments and a minimum of five consecutive years of payout growth. Those aren't high hurdles to clear, but they're barriers to entry nonetheless. Some higher-quality domestic energy producers make the cut.

For example, Chevron and ConocoPhillips are this ETF's two largest energy holdings. The pair combine for 7% of the fund's lineup. That's a positive because Chevron's streak of payout increases spans nearly four decades.

Conoco isn't yet in that rarefied territory, but it's trending in the right direction. The company directed $2 billion to shareholder rewards in the first quarter, half of which went to the dividend, while generating cash from operations of $5.4 billion. The point is that a fair number of large-cap energy names meet the stringent requirements of the Schwab ETF. Hence, the nearly 17% weight to that sector.

Does it work?

Fortunately, understanding the Schwab dividend ETF's plumbing isn't taxing, but investors are right to ask, "Does it work?" In a word, "Yes." Remembering that dividend investing is best deployed over the long term, this ETF has delivered the goods. For the decade ended May 31, 2026, just four dividend ETFs outpaced this Schwab fund. Plus, the 236% return this ETF posted over that span puts it comfortably ahead of rivals below it on the top 10 list.

There's another reason why this Schwab fund is conducive to long-term investing. It's cheap to own. The annual expense ratio is just 0.06%, or $6 on a $10,000 stake. Just three equity income ETFs have lower yearly fees.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends ConocoPhillips. The Motley Fool has a disclosure policy.