Is SCHD Really the Best Dividend ETF for Building Long-Term Income? Here's My Honest Take.

Most dividend exchange-traded funds (ETFs) have a weakness that doesn't become obvious until you examine their selection methodologies. High-yield strategies can end up owning riskier, less financially stable companies that are more volatile. Dividend growth strategies generally favor healthier businesses but tend to offer relatively lower yields.

The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) takes a different approach. It addresses both problems while adding a quality screen that many dividend investors underappreciate.

This multipronged strategy is why I believe this fund is one of the best for building long-term wealth.

Image source: The Motley Fool.

SCHD's biggest advantage is its selection methodology, not its yield

The Schwab U.S. Dividend Equity ETF tracks the Dow Jones U.S. Dividend 100 Index, which uses a selection process based on three key characteristics: dividend yield, dividend growth, and balance sheet quality.

Eligible companies must have paid dividends for at least 10 consecutive years. It then evaluates stocks using four factors: dividend yield, five-year dividend growth rate, return on equity (ROE), and free cash flow relative to debt.

What makes it effective is that these factors act as cross-checks on one another to weed out vulnerable stocks.

A high dividend yield might be an attractive income opportunity, but it could also signal financial trouble and higher risk of a dividend cut. The fund's quality screen, however, helps distinguish between the two. Strong dividend growth is good, but it's less attractive if the yield is low. The fund's focus on above-average yields, though, helps address this potential income issue.

The result is a strategy that addresses the weaknesses of different approaches instead of simply choosing one. In the end, it produces a portfolio of 100 stocks that could be considered the "best of the best" in terms of their dividend profiles.

SCHD's unique income profile

The Schwab U.S. Dividend Equity ETF currently offers a yield of 3.1%. That's a strong number and about triple that of the S&P 500 (SNPINDEX: ^GSPC). But the more important fact is that it's raised its total annual distribution every year since its 2011 inception.

That combination is one of the fund's big selling points. Dividend investors usually have to choose between high yield and dividend growth. This ETF, however, is one of the few that gives you a high level of both: Investors get high income today while capturing consistent long-term dividend growth. And the portfolio is built on durable, profitable companies that can sustain this growth for decades.

Is SCHD the best dividend ETF to own?

For investors seeking a comprehensive dividend-income strategy, I'd argue that the Schwab U.S. Dividend Equity ETF is one of the strongest choices available.

Younger investors can use their dividends to reinvest and accumulate additional shares. Those approaching retirement can use it to begin transitioning away from a growth-heavy portfolio and building a sustainable income stream. Retirees can collect their dividends to help cover living expenses.

The fund pairs especially well with broad market funds, such as the Vanguard S&P 500 ETF (NYSEMKT: VOO) or the Vanguard Total Stock Market ETF (NYSEMKT: VTI). Those with heavy growth tilts in their portfolios that own funds like the Invesco QQQ ETF (NASDAQ: QQQ) might find it particularly appropriate.

The Schwab U.S. Dividend Equity ETF won't outperform every year, but it's a practical strategy for building income without chasing the highest yields.

David Dierking has positions in Schwab U.S. Dividend Equity ETF and Vanguard Morningstar Total Stock Market ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.