2 Dividend Stocks You Won't Find in the Schwab U.S. Dividend Equity ETF (SCHD). And They're Better Buys.

Key Points

• The Schwab dividend ETF is a solid pick, but some stocks might offer more upside.

• Philip Morris International is delivering strong growth thanks to its next-gen products.

• Dominion Energy has upside potential thanks to its position in the data center boom.

• 10 stocks we like better than Philip Morris International ›

If you're looking to invest in dividend stocks, one of the most popular ways to do it is with the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). The exchange-traded fund (ETF) has net assets of nearly $70 billion, making it one of the biggest dividend ETFs around. And with a dividend yield of 3.9%, it's a much better bet than an S&P 500 ETF, which currently offers a dividend yield of just 1.2%.

The Schwab Dividend ETF aims to track the Dow Jones U.S. Dividend 100 Index, and its holdings consist of classic blue chip stocks. Its top five holdings are Chevron, ConocoPhillips, Pepsico, Merck, and Amgen, showing it draws from sectors known for dividend stocks, such as energy, consumer staples, and healthcare.

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ETFs offer advantages such as diversification, but they also have drawbacks, including a limited upside relative to individual stocks. If you're looking for dividend stocks that aren't part of the SCHD dividend ETF, keep reading to see two that look primed to outperform.

Image source: Getty Images.

1. Philip Morris International

The Schwab U.S. Dividend Equity ETF holds stocks based only in the U.S., so naturally, Philip Morris International (NYSE: PM) is excluded. The tobacco giant was formed when it was separated from Altria in 2007. Philip Morris International took control of the same set of brands, led by Marlboro, but operated them outside of the U.S.

That's proven to be a beneficial position for the company, as cigarette sales have been stronger outside of the U.S. In the second quarter, Philip Morris' volume of cigarette sales declined by 1.5%, while organic revenue from cigarettes rose 2%.

However, what's really driven the stock higher and makes it a smart buy today is the company's growth in next-gen, smoke-free products like IQOS heat-not-burn tobacco sticks and its ZYN oral nicotine pouches, which it gained in its acquisition of Swedish Match.

In the second quarter, 41% of the company's revenue came from smoke-free products. Revenue from its smoke-free products grew 15.2%, and gross profit jumped 23.3%. Overall, organic revenue rose 6.8% to $10.1 billion, and operating income was up 14.9% to $3.7 billion, showing its margins are expanding as more of its business comes from those next-gen products.

Given the momentum in those categories, the future looks bright, even as legacy peers like Altria are struggling. As a dividend payer, Philip Morris also offers a long track record of dividend growth, and it currently pays a dividend yield of 3.4%. Overall, the stock offers a great combination of growth and income.

2. Dominion Energy

No utilities are featured in the Schwab Dividend ETF, as those are represented by a different Dow Jones index. Utilities are known to be top-notch, reliable dividend payers, and Dominion Energy (NYSE: D) fits the bill with a yield of 4.5%.

The company, which earns most of its business through its electric utility in Virginia, is in an advantageous position for a utility. However, as Northern Virginia has become the capital of data centers, the data center boom, fueled by demand for artificial intelligence (AI), is driving increased demand for electricity.

The company hasn't reported second-quarter earnings yet, but the tailwinds from the data center boom seem to be showing up in its first-quarter earnings report, as revenue rose 12% to $4.08 billion, and its earnings per share (EPS) jumped 50% to $0.75.

Management is targeting EPS of $3.28 to $3.52 for the full year, which represents a 23% increase from the year before. Investors also tend to see utilities as an alternative to fixed income, so Dominion's stock price could get a boost if interest rates fall, though that may not happen soon.

Overall, Dominion offers the safety and reliability of a utility stock with the upside potential of an AI stock. If you're an income investor looking for exposure to AI, Dominion Energy is a great choice.

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Jeremy Bowman has positions in Dominion Energy. The Motley Fool recommends Dominion Energy and Philip Morris International. The Motley Fool has a disclosure policy.