Is the Schwab U.S. Dividend Equity ETF a Buy Now?

Key Points

• The Schwab U.S. Dividend Equity ETF has attracted 24% more assets in the past year, far outpacing rival dividend funds.

• While SCHD's price gains lag the broader market, its superior dividend yield makes up much of the difference for patient investors (and income seekers).

• 10 stocks we like better than Schwab U.S. Dividend Equity ETF ›

The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is a popular index fund, tied to the Dow Jones U.S. Dividend 100 index. The index and fund focus on generous, high-quality dividend policies. As a result, the ETF is centered around the classic dividend payer sectors of energy, consumer staples, and healthcare.

This is indeed a very popular fund. With $70.1 billion of assets under management, the Schwab Dividend Equity fund ranks among the 30 largest exchange-traded funds (ETFs) today.

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But is it a good ETF to buy today? Let's dive a little deeper into the Schwab U.S. Dividend Equity ETF.

Image source: Getty Images.

Investors are pouring money into this Schwab fund

This fund is having a moment in the sun right now. Among the five largest dividend-focused ETFs, the fund has seen the largest capital inflows over the last year -- by far. Its asset portfolio has grown by 24% in 52 weeks, far ahead of runner-up iShares Core Dividend Growth ETF (NYSEMKT: DGRO) at 5%.

Income investors often care less about stock prices than other investor types do, but the price performance still matters.

So it should be noted that the Schwab U.S. Dividend Equity fund tends to underperform broad market trackers like the S&P 500 (SNPINDEX: ^GSPC) in the long run. The Schwab ETF's average annual price gain over the last decade was 7.6%, well behind the S&P 500's average increase of 11.5%. The competing dividend ETF from iShares posted a stronger yearly increase of 9.3%, but neither one could come close to the overall stock market's price gains.

This period includes three presidential elections, the coronavirus pandemic, the start of the artificial intelligence (AI) boom, and the panic-and-recovery inflation cycle from 2022 to 2024. Price gains recorded across that diverse time period should be fairly representative of average long-term results.

But wait, there's more (dividends, that is)

The picture changes dramatically when you include dividend payouts in the performance charts.

The S&P 500's average dividend yield over the last decade stopped at 1.7%. The iShares dividend fund floated around a much richer 2.3%, but the Schwab Dividend Equity ETF came out on top. Its average yield was 3.1%.

As a very direct result, the Schwab fund delivered a robust total return of 11.1% per year over the last decade. This metric assumes that any dividends along the way were reinvested in more shares of the same stock or fund -- a fantastic advantage for this generous dividend payer.

Being out of favor can create opportunities

Large-cap stocks with high-quality dividend plans haven't exactly been market darlings recently. After an underwhelming performance in recent months, the Schwab fund is stuck 9% below its annual highs and 14% above recent lows. Meanwhile, the broader market is setting new price records on a regular basis.

On the upside of a soft price chart, the Schwab U.S. Dividend Equity ETF offers an above-average dividend yield of 4% right now. You can lock in that effective yield by grabbing some shares today. The fund's largest holdings include world-class businesses like Coca-Cola, The Home Depot, and Chevron -- long-term cash machines that should survive pretty much any economic calamity I could imagine. From this perspective, the dividend fund also serves as a direct bet on top-quality business giants. That concept often goes hand in hand with generous and consistently growing dividend payouts.

It's also a low-cost index fund with an annual expense ratio of 0.06%. And if you like the stock list of the underlying Dow Jones U.S. Dividend 100 index, this Schwab fund appears to be the only ETF that follows this exact index.

Is the SCHD ETF right for you?

Fully committed income investors could very well build their portfolio around this robust ETF. Others can include it to get deeper exposure to the dividend-rich corner of Wall Street, or to skew their holdings closer to large-cap value investments.

Either way, this period of lagging price performance looks like a good time to explore the Schwab U.S. Dividend Equity ETF. You don't need to back up your proverbial truck, but this ETF looks like a solid buy today.

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Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron and Home Depot. The Motley Fool has a disclosure policy.