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

Key Points

• The Schwab U.S. Dividend Equity ETF is created using a fairly complex screening process.

• The 100 companies the ETF owns are likely to be similar to the types of investments that a dividend investor would buy.

• The Schwab U.S. Dividend Equity ETF has a strong track record in dividend and capital appreciation.

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

There's no such thing as the perfect investment because every investor is slightly different. But the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) does a very good job of finding a happy middle ground that will please a lot of dividend investors. Here's why it could be the best dividend exchange-traded fund (ETF) for you to buy right now.

What does the Schwab U.S. Dividend Equity ETF do?

At its core, the Schwab U.S. Dividend Equity ETF actually doesn't really do anything because it is an index-tracking exchange-traded fund. The index does all the work, and the Schwab U.S. Dividend Equity ETF just goes along for the ride, though in a practical way investors can see the two as interchangeable. The index that the ETF tracks is the Dow Jones U.S. Dividend 100 Index.

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Image source: Getty Images.

The Dow Jones U.S. Dividend 100 Index is fairly complex. It starts out by removing real estate investment trusts (REITs) from consideration. Then it only looks at companies that have increased their dividends annually for at least 10 years. That's already a pretty elite group of companies, but the screening process isn't done yet.

The next step is to create a composite score. That score includes the metric of cash flow to total debt to examine financial strength. It includes return on equity to provide a look at company quality. It also includes dividend yield and a company's five-year dividend growth rate as a way to include dividends into the mix. The 100 companies with the highest composite scores are included in the index, and thus become part of the Schwab U.S. Dividend Equity ETF, using a market cap weighting methodology.

What does the screening process get you?

From a big-picture perspective, the Schwab U.S. Dividend Equity ETF owns a collection of financially strong companies that have good businesses with a history of reliably returning value to shareholders via growing dividends. If you are a dividend investor, that probably sounds like exactly the type of thing you would be looking for if you bought individual stocks. All of the work the ETF saves you gets done for a fairly modest 0.06% expense ratio.

Of course, the next issue to consider here is whether or not the results of the selection process work. The answer depends on your view of things. There are higher-yielding ETFs you can buy. There are also ETFs that have achieved better capital appreciation over time. But the Schwab U.S. Dividend Equity ETF's mix of income and capital appreciation is a pretty compelling middle ground.

SCHD data by YCharts

As the chart above highlights, the dividend and the price of the ETF have both trended roughly higher over time. The 3.8% dividend yield, meanwhile, is well above the 1.2% yield you'd get from an S&P 500 index (SNPINDEX: ^GSPC) ETF. All in, the Schwab U.S. Dividend Equity ETF isn't perfect, but it is a pretty compelling compromise between quality, growth, and income.

The Schwab U.S. Dividend Equity ETF is a good buy

If you are looking for a way to keep your investment life as simple as possible, the Schwab U.S. Dividend Equity ETF is a solid choice. It could be the foundation of a broader income portfolio that includes more ETFs and stocks. Or it could even be paired with a single bond ETF to create an easy-to-maintain, balanced portfolio. Essentially, if you are looking for a dividend ETF, the Schwab U.S. Dividend Equity ETF should be on your short list.

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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.