It has been a rocky start to the year for many major indexes and big-name stocks. It’s not the best feeling, but it reaffirms why investing in dividend stocks can be so effective: You’re rewarded for simply holding a stock, regardless of how the price moves.
Dividend stocks aren’t immune to volatility or slumps, but their payouts act as a natural hedge and provide passive income. If you’re looking for passive income (that’s always a good choice), consider one of the most popular dividend exchange-traded funds (ETFs) on the market: the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). It remains a great, reliable choice.
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With many stocks down through the first three months of the year, you’ll notice some dividend yields look much more attractive. A high yield is good, yes, but only when it’s due to a high payout and is sustainable. It’s not always obvious if that’s the case, but one benefit of this Schwab ETF is that the criteria companies must meet to be eligible for inclusion in the index that it mirrors (the Dow Jones U.S. Dividend 100 Index).
The Schwab U.S. Dividend Equity ETF looks at a company’s five-year dividend growth, return on equity, cash flow to debt, and dividend yield. That isn’t to say some yield traps can’t fall through the cracks, but it’s a built-in vetting process that reduces the chances of it happening.
When this Schwab ETF did its annual reconstitution (the changing of holdings) recently, it removed 22 stocks and added 25. Notable removals included AbbVie, Cisco Systems, and Valero; notable additions included UnitedHealth Group, Procter & Gamble, and Abbott Laboratories.
After the reconstitution, the sector exposure changed noticeably. Health care and tech increased by 3.6% and 3.4%, respectively. Energy and materials exposure decreased by 7.1% and 3%, respectively.
The decrease in energy stocks is notable because the sector has been the best performer over the first three months of the year, largely due to the Middle East conflict, which has driven up oil prices. Any changes in the situation could flip the script, so it makes sense to limit exposure to those stocks, especially after the impressive run at the beginning of the year.
