Is the Schwab US Dividend Equity ETF a Buy Now?

Schwab US Dividend Equity ETF (NYSEMKT: SCHD) does a lot for the fairly tiny expense ratio of 0.06% that it charges. In fact, what it does is likely to be very close to what you might do if you were trying to build a dividend stock portfolio from the ground up. Here's why Schwab US Dividend Equity ETF is worth buying now, and, frankly, most of the time, if you want to outsource your dividend investing work to someone else.

What does Schwab US Dividend Equity ETF do?

Technically, Schwab US Dividend Equity ETF is an index-tracking exchange traded fund. So, it just buys whatever the index "tells" it to. The real question for investors is, what's the index being tracked, and what does that index do? The first part is easy; the index is the Dow Jones U.S. Dividend 100 index. What it does, however, requires a little more explanation.

Image source: Getty Images.

The first hurdle for getting into the index is that a company must have at least 10 consecutive annual dividend increases under its belt. This is a typical screen used by dividend investors. (Real estate investment trusts (REITs), which are pass-through entities, are removed from consideration.) There are ETFs you can buy that simply stop at this step, but not Schwab US Dividend Equity ETF -- this is just the index's starting point.

A composite score is created for each of the companies that pass the 10-year dividend increase screen. The score includes cash flow to total debt, return on equity, dividend yield, and a company's five-year dividend growth rate. Each component of the score looks at something that a dividend investor would likely consider, including financial strength, business performance, dividend yield, and the recent growth trends of the dividend. Again, Dow Jones U.S. Dividend 100 Index, and thus Schwab US Dividend Equity ETF, is doing the work you would be doing if you were buying stocks individually.

The 100 highest-scoring stocks get into the index and ETF. They are market-cap-weighted, so the largest companies have the biggest impact on performance. The portfolio is updated annually, so the holdings are always on target with the index's goals. You get all of that work with one, low-cost investment.

SCHD data by YCharts

Schwab US Dividend Equity ETF is a good buy today, and most of the time

As the chart above highlights, Schwab US Dividend Equity ETF has tended to appreciate in value over time. However, notice that the dividend it pays has tended to rise over time, as well. So, you not only get capital appreciation but also a growing income stream. That's going to be a double win for most dividend investors, especially if they are tired of trying to pick stocks and would rather just live their lives.

There will, of course, be better and worse times to buy Schwab US Dividend Equity ETF. However, its dividend yield, at around 4%, is currently toward the high side of its historical yield range. That hints that now is a "better" time to step aboard the ETF.

SCHD Dividend Yield data by YCharts

That said, investors should probably always have Schwab US Dividend Equity ETF in the back of their minds. Its investment approach is so similar to what most dividend investors actually do in the real world that it is an easy solution if you want to add diversification to your portfolio or if you simply want to give up the chore of investing. All in, it is a strong ETF candidate just about all of the time.

Schwab US Dividend Equity ETF is looking attractive today

Part of the reason why Schwab US Dividend Equity ETF's yield is so high right now is that its largest sector exposure is energy. Oil prices have dipped, and that's pushed these stocks lower, which has, in turn, hampered Schwab US Dividend Equity ETF's performance. Don't let that stop you from buying it; the energy sector goes up and down fairly regularly. When energy prices eventually recover, as they always have in the past, the large exposure to energy will no longer be a headwind and the historically high yield here could be a thing of the past.

Should you invest $1,000 in Schwab U.S. Dividend Equity ETF right now?

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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.