The cheapest U.S. dividend-focused fund available

This low-cost fund uses profitability scoring to target high-quality dividend stocks.

Adam McCullough, CFA 6 November, 2018 | 6:00PM

The key to picking dividend funds is to focus on total return and not only dividend yield. The highest-yielding stocks likely have worse prospects than lower-yielding names. Market participants identify firms with declining fundamentals, and these stocks' prices reflect their slumping prospects ahead of them cutting or stopping dividend payments.

 Schwab U.S. Dividend Equity ETF (SCHD) is a compelling fund for exposure to profitable, large-cap U.S. stocks with attractive dividend yields. Focusing on profitability and yield lowers the risk that the portfolio holds companies that cannot support their dividend payments. A low fee adds to this sensible strategy's edge over its peers. It earns a Morningstar Analyst Rating of Silver.

The fund tracks the Dow Jones U.S. Dividend 100 Index, which selects its constituents from the 2,500 largest U.S. stocks, removes REITs and keeps the higher-yielding half that have consistently paid dividends for the past decade. Next, it scores these remaining stocks across four fundamental metrics: cash flow/debt, return on equity, dividend yield and five-year dividend growth. The 100 top-scoring stocks make the final cut and are weighted by market cap.

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About Author

Adam McCullough, CFA

Adam McCullough, CFA  Adam McCullough, CFA, is a manager research analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. He covers passive strategies.

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