Matt DiLallo, The Motley Fool
5 min read
I’m currently renovating my retirement accounts. I recently did a thorough analysis and discovered an uncomfortable truth. I’m sitting on way too much cash and short-term Treasury investments, waiting for a market downturn that might never come. That’s leading me to revamp my approach to focus on making more investments that can deliver attractive returns over the next five to 10 years, even if there’s a near-term market correction.
Schwab U.S. Dividend Equity ETF (NYSEMKT:SCHD) was near the top of the list due to its attractive dividend yield (3.2% over the last 12 months) and strong historical returns. However, before buying even more shares of the top ETF, I ran it through three questions that matter whether I owned 1 share or 1,000. The answer to these questions led me to boost my position by 50%.
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Is the dividend built to last?
An investment’s dividend yield is worthless if it isn’t sustainable. The Schwab U.S. Dividend Equity ETF tracks an index (Dow Jones U.S. Dividend 100 Index) focused on dividend quality and sustainability. Rather than simply grabbing the highest yields, it screens companies for a 10-year dividend history, cash flow relative to debt, return on equity, and dividend growth. The result is about 100 high-quality businesses, including Texas Instruments, Chevron, Procter & Gamble, and Coca-Cola, with a proven record of paying durable dividends.
Quality screens aren’t a safety net, though. Companies can cut their dividends. So, I checked how quickly SCHD’s payouts are actually growing. Using SCHD’s distribution history, annual dividends per share rose from a split-adjusted $0.68 in 2020 to $1.05 over the last 12 months, or roughly 7.5% a year. However, I did notice that its dividend growth rate has slowed considerably over the past year (2%). That slowdown is worth watching.
Is the price reasonable?
An investment can deliver lackluster returns if you pay too much for it at the beginning. SCHD reports on its website that its holdings currently have an average price-to-earnings ratio of 18.2 times and trade at 10.7 times cash flow. That’s a solid starting point — the S&P 500 currently trades at over 23 times earnings — not a screaming bargain. SCHD has rallied nearly 28% this year, compared to a 13% rise in the S&P 500.
