This Top ETF Recently Added a Healthy Dose of These High-Yielding Dividend Stocks
Key Points
The Schwab U.S. Dividend Equity ETF recently completed its annual reconstitution.
It added two new healthcare stocks to its top 10.
Healthcare is now its second-largest sector.
The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) has a very simple strategy. It tracks an index that aims to hold the top 100 high-yielding dividend stocks. That index reshuffles its holdings once a year to ensure it contains only the best of the best.
The fund recently completed its annual reconstitution. One of the more notable changes was an increase in its allocation to high-yielding dividend stocks in the healthcare sector. Here's a closer look at some of the fund's recent changes.
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Getting even healthier
The Schwab U.S. Dividend Equity ETF tracks the Dow Jones U.S. Dividend 100 Index. That index screens dividend stocks based on several dividend quality characteristics, including dividend yield, five-year dividend growth rate, and financial strength. It reconstitutes its holdings once a year to ensure it holds the 100 top high-yielding dividend stocks.
At this year's reconstitution, the index deleted 22 existing holdings and added 25 new stocks. The two biggest additions were UnitedHealth (NYSE: UNH) at a 4% allocation and Abbot Laboratories (NYSE: ABT) at 3.95%, which are now top ten holdings along with fellow healthcare giants Merck and Amgen. Meanwhile, a notable cut was AbbVie (NYSE: ABBV), which previously had a 3.31% allocation. The net result is that the fund has increased its exposure to the healthcare sector from 15.4% to 18.9% of its holdings (its second-highest weighting, behind consumer staples stocks).
The changes made to the portfolio won't have any near-term impact on the ETF's dividend. The post-reconstitution holdings have roughly the same yield as before the reconstitution, at 3.4%. However, the new holdings have a higher average dividend growth rate (9.4% average over the last five years compared to 8.6% pre-reconstitution). As a result, the fund should generate more income for investors in the long run. That faster dividend growth rate could enable the fund to generate higher total returns for investors.
Healthy dividend stocks
The Schwab U.S. Dividend Equity ETF is trading AbbVie for Abbott Labs and UnitedHealth. Unlike some of the fund's recent deletions, AbbVie is still a top-notch dividend stock. The company hiked its dividend by another 5.5% late last year. It has raised its payout every year since its 2013 spinoff from Abbott Labs. AbbVie has grown its dividend by 330% since its formation. The healthcare company also still has an attractive dividend yield of 3.3%, nearly triple the S&P 500's level of 1.2%.
AbbVie has built its dividend on the legacy of Abbott Labs. The pharmaceutical giant delivered its 54th consecutive annual dividend increase last year, maintaining its position in the elite group of Dividend Kings, companies with 50 or more years of annual dividend increases. While Abbott currently has a lower dividend yield than AbbVie at 2.4%, it's growing its payout faster. Abbott raised its dividend by 6.8% last year and has grown it by 350% since spinning off AbbVie. Meanwhile, Abbott has increased its dividend by 40% over the last five years, outpacing AbbVie's 33.1% growth rate.
UnitedHealth also has a strong record of paying dividends. The health insurance giant began paying dividends in 1990 and has increased its dividend for 17 straight years. It has grown its dividend by 52% over the last five years, including 5.5% last year. UnitedHealth currently has a 3.4% dividend yield.
They join holdovers Merck and Amgen as top 10 holdings in the Schwab U.S. Dividend Equity ETF. Merck currently has a 2.8% dividend yield while Amgen's is 2.9%. Merck has increased its dividend for 16 straight years, while growing the payout at a 5.8% annualized rate over the last five years. Meanwhile, Amgen has delivered 13 years of dividend increases while growing its payout at an annualized rate of 8.3% over the past five years.
A healthy allocation to these top dividend stocks
The Schwab U.S. Dividend Equity ETF is boosting its allocation to the healthcare sector with its latest annual reconstruction. The industry offers investors a compelling blend of yield and growth, which should help boost the fund's total returns. It remains a top ETF for investors seeking income and a healthy dose of capital appreciation potential.
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Matt DiLallo has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool has positions in and recommends AbbVie, Abbott Laboratories, Amgen, and Merck. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.
