Move Over Energy Stocks. This Uber-Popular Dividend ETF Has a New Favored Income Source.
Key Points
The Schwab U.S. Dividend Equity ETF recently completed its annual reconstitution.
The fund is cutting its exposure to energy stocks, making consumer staples its top sector.
It added Procter & Gamble and Marzetti to its portfolio, joining several other top consumer staple dividend stocks.
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The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD), a popular dividend-focused ETF (it's one of my favorites), recently completed its annual reconstitution. The index the ETF tracks updates its holdings once a year, deleting high-yielding dividend stocks that no longer pass its dividend quality screens and replacing them with companies that do. This year, the fund cut 22 existing stocks and replaced them with 25 new ones.
One outcome of these changes was that the fund significantly reduced its exposure to energy stocks, resulting in consumer staples stocks now having the highest weighting in the fund. Here's why this sector has become its new favored income source.
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The annual reshuffling
The Schwab U.S. Dividend Equity ETF passively follows an index (Dow Jones U.S. Dividend 100 Index) that tracks 100 top high-yielding dividend stocks. It screens companies based on several dividend quality characteristics, including dividend yield, five-year dividend growth rate, and financial strength. The index reconstitutes its holdings once a year, adding companies that pass its screens and cycling out those that are no longer among the best dividend stocks.
The fund cut several energy stocks this year, significantly reducing its sector allocation. Before the reconstitution, the Schwab U.S. Dividend Equity ETF had a 23.5% allocation to energy stocks, its highest sector weighting. That's down to 16.3% post-reconstitution, the third highest weighting. As a result, consumer staples stocks have risen from the fund's second-largest sector weighting to the top at 19.4%.
Adding two more Kings
The index added two consumer staple stocks this year: Procter & Gamble (NYSE: PG) and Marzetti (NASDAQ: MZTI). Procter & Gamble will have a 3.8% allocation in the fund, putting it in the top 10, while Marzetti will have a 0.08% weighting.
Procter & Gamble has an illustrious history of paying dividends. The iconic consumer brands company -- Procter & Gamble owns Charmin, Crest, Gillette, and many others) -- has been paying dividends for 135 consecutive years (since its incorporation in 1890). It has increased its dividend for 69 straight years, one of the longest streaks in the world. That qualifies it as a Dividend King, a company with 50 or more years of annual dividend increases. The company currently has a 3% dividend yield, nearly triple the S&P 500's level of 1.2%.
Marzetti (formerly Lancaster Colony) manufactures and sells specialty food products, including the exclusive license for Chick-fil-A sauces and dressings. The company has increased its dividend for 63 consecutive years. That also qualifies it as a Dividend King. Marzetti is one of only 12 U.S. companies that have delivered 63 years of annual dividend increases. The company currently has a 2.9% dividend yield.
Those two new additions join several other leading consumer staples stocks held by the Schwab U.S. Dividend Equity ETF. The top two are Coca-Cola (NYSE: KO) and PepsiCo (NASDAQ: PEP). The fund has a 4% allocation to the iconic beverage giants, putting both in the top 10.
Coca-Cola and PepsiCo are also Dividend Kings. Coca-Cola is a year ahead of Marzetti as it extended its streak to 64 consecutive years earlier this year. Meanwhile, PepsiCo pushed its streak to 54 straight years in early 2026. Both beverage giants offer high dividend yields (Coca-Cola's is 2.8%, while PepsiCo's is 3.7%). Adding Procter & Gamble as a top-10 holding with that dynamic dividend duo provides the fund with another very durable source of growing dividend income.
Staples for dividend investors
Consumer staples stocks tend to be some of the most durable and consistent dividend stocks. Demand for consumer staples remains resilient during a recession because these food, beverage, household, and consumer care products are essential for daily life. That makes consumer staples stocks great core income holdings for a fund like SCHD or your portfolio, as they should provide stable, steadily rising dividend income throughout the economic cycle.
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Matt DiLallo has positions in Coca-Cola, PepsiCo, and 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.
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