This Top Dividend ETF Is Relying on These Stocks to Fuel Its High-Yielding Payout

Key Points

• The Schwab U.S. Dividend Equity ETF has a high allocation to energy stocks.

• The sector has the highest average dividend yield in the S&P 500.

• Top energy stocks like Chevron, ConocoPhillips, and ONEOK have excellent records of growing their dividends.

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

Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) stands out among dividend-focused ETFs for offering investors access to 100 high-quality, high-yielding dividend stocks at a very low cost (0.06% expense ratio). This enables investors to collect an attractive and steadily increasing stream of dividend income from high-quality companies.

While the fund provides broad exposure to dividend stocks across most sectors, energy stocks in particular play a major role in fueling its dividend. To illustrate this impact, here's a closer look at the ETF and its meaningful exposure to the energy sector.

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Drilling down into the Schwab U.S. Dividend Equity ETF's holdings

The Schwab U.S. Dividend Equity ETF aims to track the Dow Jones U.S. Dividend 100 Index. This index focuses on four key dividend quality characteristics to ensure it only holds companies with a proven record of financial strength and dividend reliability:

• Cash flow to debt.
• Return on equity.
• Indicated dividend yield.
• Five-year dividend growth rate.

The index reconstitutes its holdings annually, removing dividend stocks that no longer meet its high standards and replacing them with higher-quality dividend stocks. At its last annual reconstitution in March, the fund added 22 stocks, including five energy companies. At the time, its 100 holdings had an average dividend yield of 3.8% and had grown their payouts at an 8.4% annual rate over the past five years. As a result of this change, the energy sector currently holds the highest allocation in the fund, accounting for over 19% of its assets.

This high allocation is notable because, currently, the energy industry offers some of the most attractive dividends. It features the highest average dividend yield among the S&P 500 at 3.4%, nearly triple the index's 1.2% average. This high average yield is a result of low valuations and a strong focus on dividends among leading energy stocks.

High-octane dividend stocks

The Schwab U.S. Dividend Equity ETF currently holds a dozen energy stocks led by Chevron (NYSE: CVX). The global oil giant is its second-largest holding, accounting for 4.4% of its assets. Chevron certainly checks all the boxes. It has a 4.4% dividend yield and has increased its payout for 38 straight years, including growing it at an industry-leading pace over the past decade. Chevron also has one of the strongest balance sheets in the oil sector. The oil company is in an excellent position to continue growing its dividend as its recent acquisition of Hess enhanced and extended its production and free cash flow growth outlook into the 2030s.

Next on the list is oil and gas producer ConocoPhillips (NYSE: COP). It's the fund's fourth largest holding at a 4.2% allocation. ConocoPhillips currently has an above-average dividend yield of 3.4%. It has also grown its dividend at a robust rate in recent years -- over 80% during the past five years. The oil company's target is to deliver dividend growth within the top 25% of companies in the S&P 500 going forward. It's in a strong position to deliver on that goal as it expects to produce over $7 billion in incremental annual free cash flow by 2029 as its current slate of long-term projects comes online.

Oil and gas producers aren't the only energy stocks held by this fund. For example, it has a 1.8% allocation to energy infrastructure company Oneok (NYSE: OKE). The pipeline company has a robust 5.8% dividend yield. It backs its payout with stable cash flow, as 90% comes from fee-based sources. Oneok has delivered over a quarter century of dividend stability and growth. While it hasn't raised its payment every year, it has delivered peer-leading dividend growth over the past decade. Oneok aims to increase its high-yielding dividend by 3% to 4% per year. Achieving that target shouldn't be a problem, considering that it has organic expansion projects in the backlog that are on track to come online through 2028.

Giving this ETF the fuel to pay an attractive and growing dividend

Energy stocks are a key contributor to the Schwab U.S. Dividend Equity ETF's ability to pay a high-yielding and steadily rising dividend. Top energy stock holdings, such as Chevron, ConocoPhillips, and Oneok, have a long history of paying attractive and growing dividends. With more dividend growth ahead, they should give this ETF the fuel to continue supplying investors with more dividend income.

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Matt DiLallo has positions in Chevron, ConocoPhillips, and Schwab U.S. Dividend Equity ETF. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Oneok. The Motley Fool has a disclosure policy.