The Best Dividend ETF to Invest $500 in Right Now

Investing doesn't need to be complicated.

For those who don't want to stay up on individual companies, exchange-traded funds (ETFs) are a great option. ETFs often represent a group of stocks or other assets trading under a single ticker symbol. Usually, ETFs focus on a specific industry or investment style, or track a stock market index.

The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is an excellent fund for dividend-focused investors. It tracks the Dow Jones U.S. Dividend 100 Index.

Here is why it could be the smartest ETF to invest $500 in right now.

Image source: Getty Images.

A way to diversify from technology stocks

There's no sense in trying to guess what the stock market may do next, but there is some wisdom in reacting to worrisome trends. There's no doubt that technology stocks have run wild for most of the past few years.

As fun a ride as it has been, it's resulted in some breathtaking concentration within the S&P 500 index. The information technology sector has risen to about 33% of the index, with communication services adding another 10%. Such a high concentration poses a risk to investors if technology stocks break down, as they did when the dot-com bubble burst in 2000.

Again, this is not predicting a stock market crash. That said, it would be wise to consider some less technology-focused investments.

The Schwab U.S. Dividend Equity ETF only has about 13.5% total exposure to information technology and communication services. Instead, it leans heavily into other market sectors, led by:

• Energy: 19.2%
• Consumer Staples: 18.8%
• Healthcare: 15.5%
• Industrials: 12.5%

Additionally, the Schwab U.S. Dividend Equity ETF currently trades at approximately 3 times its book value. The S&P 500 is valued at roughly 5 times its book value today. Those technology stocks have carried the index to great heights, accompanied by a steep valuation.

Many of these leading technology companies are also spending hundreds of billions of dollars on capital expenditures for artificial intelligence. At the very least, it makes sense to protect your portfolio by working in some non-technology investments, in case things start to unwind. The Schwab U.S. Dividend Equity is a fantastic avenue to do that.

A dividend yield near its highs

One perk of dividend investing is that it can establish a floor for your investments. Stock prices can go up, but you don't actually have those gains unless you sell the stock and realize them. Dividends are yours once the stocks pay them, even if you don't sell your shares.

That can be nice to have, especially during market downturns.

The Schwab U.S. Dividend Equity ETF's dividend yield is 3.9%, nearly the highest it has ever been.

Oftentimes, a stock with a high yield can be risky if the underlying business is unhealthy. It's a little different here -- the Schwab U.S. Dividend Equity ETF comprises 103 stocks, many of which are blue chip companies.

The ETF's top holdings include stalwarts with proven histories of consistently raising their dividends, such as AbbVie, Lockheed Martin, Cisco Systems, Altria Group, Chevron, and Coca-Cola. It's doubtful that enough of them would cut their dividends to jeopardize the ETF.

A potential play for the post-AI boom

No single investment strategy or market sector consistently performs well. Over time, different investments and styles take turns thriving. You can see below that the Schwab U.S. Dividend Equity ETF has tracked the S&P 500 index closely for most of its existence, sometimes underperforming and outperforming it:

Data by YCharts.

You can also see that the S&P 500 has pulled away since about 2023. That's due to the AI boom, and it's fair to wonder whether that massive gap will begin to close at some point. In other words, the Schwab U.S. Dividend Equity ETF could outperform the S&P 500 for a bit once investors stop piling into technology stocks.

The goal isn't to time that happening, but to diversify your portfolio so that you'll be ready if it does happen.

In all, the Schwab U.S. Dividend Equity ETF's diversified holdings, high dividend yield, and non-technology emphasis in a market that has overwhelmingly favored technology for several years combine to make it a potentially brilliant ETF to invest your next $500 in.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbbVie, Chevron, and Cisco Systems. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.