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The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is one of the largest exchange-traded funds (ETFs) focused on dividend stocks. The fund has over $77.5 billion in assets under management (AUM), making it the second-biggest fund geared specifically toward dividend investing.
The Schwab U.S. Dividend Equity ETF doesn't just invest in any dividend stock. It focuses on companies with the highest-quality payouts. The fund tracks the Dow Jones U.S. Dividend 100 Index, which selects stocks based on their ability to pay sustainable dividends that steadily grow.
The managers of that index screen companies to ensure they meet and maintain the highest-quality dividend standards. Once a year, they remove companies that no longer pass their review and replace them with higher-quality dividend stocks. The index recently completed its annual reconstitution, which led the dividend ETF to make some major changes.
The annual rebuild
The managers of the Dow Jones U.S. Dividend 100 Index screen companies based on four dividend quality characteristics:
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Cash flow to total debt
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Return on equity (ROE)
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Indicated dividend yield
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Five-year dividend growth rate
The index recently cut 23 companies from its list and replaced them with 23 new ones. Because the Schwab U.S. Dividend Equity ETF tracks this index, it made the same changes to its holdings.
Out with the old
Among the 23 deletions is industrial giant 3M (NYSE: MMM). It's easy to see why 3M is no longer on the list of top dividend stocks. Last May, 3M slashed its quarterly dividend payment from $1.51 to $0.70 per share. That ended a streak of 64 years of dividend growth for the industrial conglomerate.
Several factors contributed to the cut, including legal liabilities and the spinoff of its former healthcare unit to create Solventum. With dividend growth a key quality factor, 3M had to go.
Another notable deletion from the list was semiconductor giant Broadcom (NASDAQ: AVGO). Unlike 3M, Broadcom has continued to increase its dividend. Last year, it raised its payment by another 11%. That extended its growth streak to 14 straight years.
Where Broadcom falls short is its dividend yield. With its stock price rallying last year due to artificial intelligence (AI)-driven enthusiasm for its semiconductors, Broadcom's dividend yield is down to 1.2%. That's lower than the S&P 500 (SNPINDEX: ^GSPC) (1.3% yield) and the average yield of stocks in the index (3.5%). Because of that, it was no longer a good fit for a dividend-focused investment vehicle.
In with the new
The ETF is replacing the dividend stocks it cut with several new ones that pay even higher-quality dividends. For example, it added the high-yielding Vail Resorts (NYSE: MTN). The ski resort operator currently yields 5.5%. Vail also has a solid record of paying a growing dividend.