1 Magnificent ETF I'm Buying Hand Over Fist in 2026

I typically buy individual stocks. However, I've started investing in more exchange-traded funds (ETFs) over the past year. They help me further diversify my portfolio and sharpen my focus on my highest conviction ideas.

Dividend stocks are one of my highest conviction investments due to their historical outperformance over companies that don't pay dividends. The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) does a magnificent job tracking the best ones, which is why I have been buying the ETF hand over fist this year.

Image source: Getty Images.

Focused on the best-of-the best

The Schwab U.S. Dividend Equity ETF has a very straightforward investment strategy. It aims to closely track the performance of the Dow Jones U.S. Dividend 100 Index. That index screens companies to find those with higher yields, a consistent record of dividend payments, and relatively strong financial metrics compared to their peers. Among its quality screens are a stock's dividend yield and five-year dividend growth rate. The net result is an index that tracks 100 of the highest-quality, high-yielding dividend stocks.

The index reruns its screen each year and will jettison lower-quality dividend stocks in favor of those with better metrics, ensuring it tracks the top 100 high-yielding dividend stocks. At its last reshuffle, the index booted 22 existing stocks and added 25 new ones. Following the revamp, the index's holdings had an average yield of 3.4% (the same as before and well above the S&P 500's 1.1% yield) and had grown their dividends at a 9.4% annualized rate over the last five years, up from 8.6%.

That dual focus on yield and dividend growth is worth noting. Over the long term, dividend growth stocks have delivered the highest return by dividend policy:

Data source: Ned Davis Research and Hartford Funds.

Unsurprisingly, the Schwab U.S. Dividend Equity ETF's concentrated focus on the best high-yielding dividend growth stocks has yielded strong total returns. Since its inception in 2011, the ETF has delivered an annualized total return of 13.3%.

Further diversifying my dividend investments

The strong returns of dividend growth stocks are why I own several in my portfolio. However, I don't own them all. That's why I also like to hold the Schwab U.S. Dividend Equity ETF, which I see as a good complement to my existing dividend stock portfolio. It helps to further diversify and deepen my holdings.

For example, I only hold four of its 10 largest holdings. Because of that, I'm missing out on some high-quality dividend stocks. Of note, four of its top 10 holdings are healthcare stocks, none of which I currently own. One of those holdings is UnitedHealth Group (NYSE: UNH). The health insurance giant has paid a dividend since 1990 and has increased its payout for the last 16 consecutive years, including a recent 5% increase. It currently yields 2.2%. By investing in SCHD, I'm adding exposure to higher-quality dividend stocks, such as UnitedHealth.

I plan to continue buying this outstanding ETF

I've purchased some shares of the Schwab U.S. Dividend Equity ETF almost every month this year. It delivers above-average income, strong returns, and enhances my diversification. That's why I expect to continue adding to my position this year.

Matt DiLallo has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.