Investing doesn't have to be difficult.
If you prefer not to track individual companies, exchange-traded funds (ETFs) offer an excellent alternative. ETFs typically consist of a collection of stocks or other assets that are traded under a single ticker. Most ETFs are designed to follow a particular sector, investment strategy, or stock market index.
The Schwab U.S. Dividend Equity ETF ( SCHD -0.32%) stands out as a top choice for those seeking dividend income. This fund mirrors the performance of the Dow Jones U.S. Dividend 100 Index.
Here’s why this ETF could be the smartest place to put $500 right now.
Image source: Getty Images.
A way to diversify from technology stocks
While it's impossible to predict the market's next move, it is wise to pay attention to concerning patterns. Over the past several years, technology stocks have experienced tremendous growth.
This surge has led to a significant concentration in the S&P 500 index. Technology now accounts for about 33% of the index, with communication services making up another 10%. Such heavy weighting can be risky if tech stocks falter, as seen during the dot-com crash in 2000.
Again, this isn't a forecast of a market collapse. However, it’s sensible to consider investments that are less reliant on technology.
The Schwab U.S. Dividend Equity ETF has only about 13.5% of its portfolio in technology and communication services. Instead, it is more heavily invested in other sectors, including:
- Energy: 19.2%
- Consumer Staples: 18.8%
- Healthcare: 15.5%
- Industrials: 12.5%
Moreover, the Schwab U.S. Dividend Equity ETF is currently priced at around three times its book value, compared to the S&P 500’s valuation of about five times book value. The tech sector’s rally has driven the index higher, but also made it more expensive.
Many top tech companies are also investing vast sums in artificial intelligence. At a minimum, diversifying with non-tech investments can help safeguard your portfolio if the tech sector cools off. The Schwab U.S. Dividend Equity ETF is a great way to achieve that balance.
A dividend yield near its highs
One advantage of focusing on dividends is that it can provide a safety net for your investments. While stock prices fluctuate, you only realize gains when you sell. Dividends, on the other hand, are paid out regardless of whether you sell your shares.
This can be especially reassuring during periods of market volatility.
The Schwab U.S. Dividend Equity ETF currently offers a 3.9% dividend yield, which is close to its historical peak.
High-yield stocks can sometimes be risky if the underlying companies are struggling, but that’s not the case here. The Schwab U.S. Dividend Equity ETF holds 103 stocks, many of which are established blue chip firms.
Its largest positions include reliable dividend growers like AbbVie, Lockheed Martin, Cisco Systems, Altria Group, Chevron, and Coca-Cola. It’s unlikely that enough of these companies would reduce their dividends to threaten the ETF’s payouts.
A potential play for the post-AI boom
No single investment approach or sector leads the market all the time. Over the years, different strategies and sectors take turns outperforming. As shown below, the Schwab U.S. Dividend Equity ETF has generally tracked the S&P 500, sometimes lagging and sometimes pulling ahead:
Data by YCharts.
Since around 2023, the S&P 500 has pulled ahead, largely due to the surge in AI-related stocks. It’s reasonable to wonder if this gap will eventually narrow. If investors shift away from tech, the Schwab U.S. Dividend Equity ETF could outperform the S&P 500 for a time.
The aim isn’t to predict when this shift will occur, but to ensure your portfolio is diversified and prepared for it.
Overall, the Schwab U.S. Dividend Equity ETF’s broad sector exposure, strong dividend yield, and lower reliance on technology make it a compelling choice for your next $500 investment, especially in a market that has heavily favored tech in recent years.
