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The market as a whole has dramatically favored AI stocks over dividend-paying value stocks over the past couple of years.
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This dynamic, however, may be on the verge of a major reversal.
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New buyers of this fund will lock in a strong dividend yield on their invested capital, no matter what changes in the foreseeable future.
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10 stocks we like better than Schwab U.S. Dividend Equity ETF ›
In the world of work, more activity often means more productivity. More sales. More output. More accomplishment.
The same doesn’t apply when it comes to investing, though. Indeed, highly active investors often end up undermining their own performance, with too much trading and too many stocks to monitor. When it comes to investing, less is more. Less trading and less complexity often lead to better results.
With that as the backdrop, if you’re looking for solid and simple dividend income for a long, long time, there’s at least one dividend index fund that’s a must-have for your portfolio. That’s the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). Here’s why.
It’s certainly not the only dividend-focused exchange-traded fund (or ETF) to choose from. The Vanguard Dividend Appreciation ETF and the iShares Core Dividend Growth ETF are popular options as well.
It’s not the best-performing dividend fund out there either. Since the market’s mid-2023 low, SCHD’s 24% gain dramatically trails the S&P 500‘s (SNPINDEX: ^GSPC) advance of 90%.
The Schwab U.S. Dividend Equity ETF does beat the other two top ETFs in this space in one important way. That’s its yield. This fund’s trailing dividend yield currently stands at just under 3.9%, versus VIG’s 1.6% and DGRO’s 2%.
What gives? Blame the Schwab fund’s underlying index — the Dow Jones U.S. Dividend 100 Index. It only includes stocks with at least 10 consecutive years of per-share dividend growth. The equal-weighted index also prioritizes higher yields along with free cash flow, and prefers lower-debt companies. The end result is a basket of well-established quality dividend payers, which notably excludes AI-powered winners like Nvidia and Broadcom. With an average trailing price-to-earnings ratio of less than 17, in fact, SCHD is far more of a value fund than a growth fund, and value stocks just aren’t what the crowd wants these days.
But that could be about to change.
The worries that artificial intelligence stocks are in a price bubble are legitimate. The collective forward-looking price-to-earnings ratio of the “Magnificent Seven” is 28.2 (according to data from Yardeni Research) — sky-high compared to the average projected P/E of just under 20 for every other name in the S&P 500. While nobody denies the advent of AI represents a fantastic growth opportunity, this steep valuation still doesn’t quite make sense.
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