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Charles Schwab added another ETF to its lineup on Wednesday, launching a fund that focuses on dividend-paying U.S. stocks. The new Schwab U.S. Dividend ETF (NYSEARCA:SCHD) will seek to replicate the Dow Jones U.S. Dividend 100 Index, a modified cap-weighted benchmark that includes 100 dividend-paying equities.

In order to be eligible for inclusion in the underlying index, stocks must have at least 10 consecutive years of dividend payments. The universe of stocks that meet that criteria are evaluated on four characteristics that are used to determine which are included in the index:

  • Cash flow to total debt
  • Return on equity
  • Dividend yield
  • Five-year dividend growth rate

Stocks with the highest scores on those four criteria are selected for inclusion in the index, which affords a maximum weight of 4.5% to any one stock and a sector cap at 25%. REITs, master limited partnerships, preferred stock and convertibles are excluded from the index.

Dividend ETFs In Focus

Amidst continued anxiety over the outlook for global equity markets, interest in dividend-focused strategies has surged. And many advisors and investors have elected to pursue access to dividend-paying stocks through exchange-traded products, embracing the transparency and efficiencies of the exchange-traded structure. There are dozens of funds offering exposure to dividend-focused strategies, including funds linked to dividend-weighted indexes and products that implement various dividend-focused screens to select component companies.

Generally, dividend ETFs can be split between products that focus on consistency of distributions and those that value the absolute yield delivered more heavily. SCHD implements a unique approach. Because stocks must have a long track record of distributions (i.e., 10 years), the index will likely avoid smaller, more speculative companies whose beaten down stock prices have resulted in a hefty dividend yield. At the same time, the focus on various cash flow and profitability metrics along with yields and dividend growth rates should result in a portfolio that offers a distribution materially greater than the broad market.

SCHD will charge an expense ratio of just 0.17%, making it one of the cheapest options available for investors looking to gain access to dividend-paying stocks. Like all Schwab ETFs, the new fund will be eligible for commission free trading within Schwab brokerage accounts.

Under The Hood

SCHD has 100 components in total, and maintains a sector allocation that is considerably different from the broad U.S. market. Consumer goods firms account for the largest percentage of the underlying index at a little more than 20%, followed by industrials, consumer services and healthcare. The smallest sector allocations are made to utilities, financials and telecom; those three sectors combine to make up just about 5% of the underlying benchmark. That may be somewhat surprising considering the dividend-focused objective of the fund, as those three sectors are often home to some of the more attractive dividend yields on the market.

The list of component companies includes a number of blue chip U.S. stocks, such as Coca Cola (NYSE:KO), IBM (NYSE:IBM) and Chevron (NYSE:CVX). Of the 10 largest stocks in the underlying index as of 8/31, six of them are also among the top 10 single allocations in the S&P 500 Index Fund (NYSEARCA:IVV). According to the official fund fact sheet, the dividend yield on the underlying index at the end of August was 3.05%. At that time, the index had a P/E ratio of 13x and a P/B metric of about 2.9x.

Disclosure: No positions at time of writing.

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Source: Another Dividend ETF Debuts: Schwab's SCHD