Schwab Dividend Index 2024 Annual Reconstitution

The Dow Jones U.S. Dividend 100 Index is designed to measure the performance of high-dividend-yielding stocks in the U.S. with a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios.

The index universe is defined as the constituents of the Dow Jones U.S. Broad Stock Market Index, excluding REITs.. Source:  S&P Global

Stocks must pass the following screens:

• Minimum 10 consecutive years of dividend payments

• Minimum FMC of US$ 500 million

• Minimum three-month ADVT of US$ 2 million

Stocks that pass all screens are ranked by dividend yield. The top half are eligible for inclusion. 

Constituent selection is as follows:

1. The eligible securities are ranked by each of four fundamentals-based characteristics:

• Free cash flow to total debt: Annual net cash flow from operating activities divided by total

debt. Companies with zero total debt are ranked first.

• Return on equity: Annual net income divided by total shareholders’ equity.

• IAD yield

• Five-year dividend growth rate 

2. The four rankings are equal weighted to create a composite score, and the eligible securities are

ranked based on this composite score.

3. The 100 top-ranked stocks by the composite score are selected to the index, subject to the

following buffer rules that favor current constituents during the annual review.

• The constituent stocks will remain in the index as long as they are among the top 200

rankings by the composite score.

• Non-constituent stocks are added to the index based on their rankings until the

constituent count reaches 100.

• If two non-constituents have the same composite score, the non-constituent with the

higher dividend yield will be selected.

Stocks in the index are weighted quarterly, based on a capped FMC weighted approach. No single stock can represent more than 4.0% of the index and no single Global Industry Classification Standard (GICS®) sector can represent more than 25% of the index, as measured at the time of index construction, annual rebalancing, and quarterly updates. 

The index is subject to a daily weight cap check. If the sum of stocks with weights greater than 4.7% exceeds 22%, the index is re-weighted using a quarterly weighting method.

The index is the benchmark used by the popular dividend ETF the Schwab US Dividend Equity ETF (SCHD). It is rebalanced once per year. This years re-constituting just happened. I actually reviewed the ETF in 2016, and didn't hate it. However I did not buy it then because I did not like the high turnover.

The column on the left shows the 24 companies that were removed. The column on the right shows the 24 companies that were added.

Note I created this list myself by comparing the holdings in the Schwab Dividend ETF today at the Schwab website, versus the holdings int he Schwab Dividend ETF as of Feb 29, available on the Fidelity Study.

It looks like the turnover accounted for something like 24% - 25% of the portfolio weightings. The largest components being taken out include Broadcom (AVGO) with a 5.07% weight, Merck (MRK) with a 4.69% weight and ADP (ADP) with a 3.09% weight.

On a side note, you do not get taxed on those gains from the re-balancing within an ETF as an ETF shareholder. You also do not get any deductions on losses within an ETF from re-balancing either however.

In general I dislike high turnover, because it means that this ETF holds stocks on average for 4 - 5 years only. The number of companies I am investing in is not stable, so in effect it is as if I am investing into a trading strategy almost. I prefer to hold a more passive approach to investing, with low turnover and rarely selling anything. I also prefer to build my own portfolios at home, one company at a time. That way I can control:

1. What companies go in the portfolio

2. The entry valuations

3. Portfolio weights

4. Holding period/Turnover

5. Cost

Whether you should buy individual dividend growth stocks or dividend growth etf however is another trade-off you have to accept for yourself.

Relevant Articles:

- Dividend Stocks versus Dividend ETFs

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Five Dividend Growth Companies Increasing Dividends Last Week

I review the list of dividend increases every week, as part of my monitoring process. This exercise helps me monitor existing holdings but also identify companies for further research. I usually focus on the companies that have managed to increase dividends for at least ten years in a row. 

A long history of annual dividend increases does not happen by accident. It is usually a result of a strong business that generates excess cashflows. But as we all know, past performance is also not always an indication of future results.

This exercise simply puts companies on my list for further research. Afterwards, I review each company briefly, before determining if I should pursue the idea further or set it aside.

Over the past week, there were 23 companies that increased dividends to shareholders in the US. Five of these companies have managed to increase dividends for at least ten years in a row.

Colgate-Palmolive Company (CL)  manufactures and sells consumer products in the United States and internationally. It operates through two segments: Oral, Personal and Home Care; and Pet Nutrition.

The company increased quarterly dividends by 4.20% to $0.50/share. This is the 61st consecutive annual dividend increase for this dividend king. Over the past decade, the company has managed to increase dividends at an annualized rate of 3.68%.

Between 2014 and 2023 the company grew earnings slightly from $2.36/share to $2.77/share. The company is expecting to earn $3.49/share in 2024.

The stock sells for 25.35 times forward earnings and yields 2.26%.

Shoe Carnival, Inc. (SCVL) operates as a family footwear retailer in the United States.

The company increased quarterly dividends by 12.50% to $0.135/share. This is the 12th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 13.56%.

The company has managed to grow earnings from $0.66/share in 2014 to $4/share in 2023. The company is expected to earn $2.70/share in 2024.

The stock sells for 12.06 times forward earnings and yields 1.65%.

Steel Dynamics, Inc. (STLD) operates as a steel producer and metal recycler in the United States.

The company raised quarterly dividends by 8.20% to $0.46/share. This is the 15th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to increase dividends at an annualized rate of 14.15%.

Between 2014 and 2023, the company managed to grow earnings from $0.68/share to $14.72/share.

the company is expected to earn $10.59/share in 2024.

The stock sells for 13 times forward earnings and yields 1.33%.

UDR, Inc. (UDR), an S&P 500 company, is a leading multifamily real estate investment trust with a demonstrated performance history of delivering superior and dependable returns by successfully managing, buying, selling, developing and redeveloping attractive real estate communities in targeted U.S. markets.

The company increased quarterly dividends by 1.20% to $0.425/share. This is the 14th consecutive annual dividend increase for this dividend achiever. Over the past decade, this REIT has managed to grow dividends at an annualized rate of 5.89%.

UDR grew FFO/share from $1.58 in 2014 to $2.46 in 2023.

This REIT is expected to generate $2.45/share in FFO in 2024.

The stock sells for 15.14 times FFO and yields 4.57%.

Williams-Sonoma, Inc. (WSM) operates as an omni-channel specialty retailer of various products for home.

The company increased quarterly dividends by 26% to $1.13/share. This is the 18th consecutive annual dividend increase for this dividend achiever. Over the past decade, the company has managed to grow dividends at an annualized rate of 11.71%.

Between 2015 and 2024, the company has managed to grow earnings from $3.30/share to $14.71/share.

The company is expected to earn $15.13 in 2024.

The stock sells for 18.76 times forward earnings and yields 1.59%.

Relevant Articles:

- 17 Dividend Growth Stocks Raising Shareholder Distributions

- Six Dividend Growth Stocks Raising Shareholder Distributions

- 16 Dividend Growth Companies That Increased Dividends Last Week

- Eighteen Companies Rewarding Shareholders With a Raise

The Return of the Dividend

A pattern of steady dividend payments and dividend increases is only possible if a business can generate enough cashflows to support operations and expansion, while also generating torrents of excess free cash flows.

That dividend provides signaling value to shareholders that there are indeed solid and dependable cashflows to support it. Those cashflows are also supported by the business.

In fact, in the old days (prior to the 1980s), investors would not touch a stock that didn't pay a dividend. The idea was that a company which does not pay a dividend simply cannot afford to pay it. It was a speculative company that typically didn't earn much money.

Since the days of the 1990s and the tech bubble, investors have been shunning dividends, and focusing only on the share price. It takes a few bear markets to remind investors that trees do not grow to the sky. 

At some point, a stable dividend generated from a good business can be a major calming force during a bear market or an extended flat market. For a company that generates a ton in cashflows, it makes little sense not to pay a dividend. Dividends provide management with focus on the projects with the highest return on investment. Having that focus and a hurdle rate, coupled with a regular commitment to shareholders, makes it less likely that management teams would do something silly with the money. A stable and growing dividend also signals maturity and stability in cashflows. 

When management teams are swimming in cash, they could focus on projects of dubious value, get more perks like corporate jets, and other silliness. That dividend provides focus and discipline to the capital allocation process.

Over the past several weeks, there were several notable dividend initiators.

Those include:

Meta (META), which initiated a quarterly dividend of $0.50/share in February.

Booking Holdings (BKNG), which initiated a quarterly dividend of $8.75/share in February.

Salesforce.com (CRM), which initiated a quarterly dividend of $0.40/share in February.

It would be interesting to see if these companies manage to grow those dividends from here as well.

It seems as if companies are finally wisening up and sharing their generous cashflows with shareholders.

I would welcome seeing more tech juggernauts that can afford to pay a dividend actually starting to pay dividends. One that's long overdue is Alphabet (GOOG).

It would be interesting to see if number of payers on the S&P 500 increases as well. These are the trends we are witnessing as of this year:

On a side note, this increase in number of dividend paying companies, particularly in the tech sector, is not new. We saw that a little over a decade ago. Please check the relevant articles below:

Relevant Articles:

- Dividends are Powering Up the Tech Sector

- Has the time for Tech Dividends arrived?

- Tech Dividends on the Rise

- Dividend Initiators: A Fertile Ground For Research

Six Dividend Growth Stocks Raising Shareholder Distributions

I review the list of dividend increases as part of my monitoring process every week. This exercise helps me review the performance of existing holdings, and potentially identify companies for further research.

It's helpful to point out how I quickly evaluate a company, before deciding if it is worth additional research for potential inclusion in my portfolio.

When I evaluate a company I look at:

1. Trends in earnings per share over the past decade. Without growth in earnings per share, future dividend growth will be difficult. This growth can be achieved in any sort of way, but it is the fuel behind future dividend growth and increases in intrinsic value.

2. Trends in the payout ratio over the past decade. The payout ratio helps me evaluate dividend safety, and in general the lower the ratio the better. However I also want to ensure that growth in dividends is not generated through an increase in the payout ratio over time, because that has a natural limit. There is some nuance here as well, as companies in the initial phase of dividend growth can grow the payout ratio from a low base. But in general, I want to see an adequate payout ratio that is in a range.

3. I like to review the trends in dividend growth, and compare the most recent increases to it. We all want stable rate of dividend growth, but in reality the rate of change tends to fluctuate a little bit. I do not want a decelerating dividend growth, coupled with a recent streak of token dividend raises. Those signal potential trouble ahead. Dividend increases have a signaling effect.

4. I also look at the valuation as well. This takes into consideration P/E ratio, earnings growth, dividend yield, in order to come up with an estimated range of value. One needs to take into consideration how cyclical the earnings are as well. There is a fair amount of trade-offs to think through as well, mostly between yield and growth, as well as how sustainable that yield and growth really are.

5. Once a company makes it through those screens, we have to review it qualitatively as well. This is subjective, and part art, part science. The most brilliant equity analysts can pick up how a company makes money, if it has any competitive advantages, and would be able to generate high returns on investment in the future, given industry trends. However, it is important not to fall prey to narrative bias and wishful thinking and spend the time looking for qualitative factors that justify a company for which the numbers tell a different story.

With this out of the way, it's time to look at the reason for today's post - reviewing actual dividend increases from last week. 

Over the past week there were six companies that managed to increase dividends, which also have at least a ten year track record of annual dividend increases. The companies include:

General Dynamics Corporation (GD) operates as an aerospace and defense company worldwide. It operates through four segments: Aerospace, Marine Systems, Combat Systems, and Technologies.

The company increased quarterly dividends by 7.60% to $1.42/share. This is the 30th year of consecutive annual dividend increases for this dividend aristocrat. 

Over the past decade, the company has managed to increase dividends at an annualized rate of 9.07%.

The company has managed to grow earnings from $7.56/share in 2014 to $12.14/share in 2023. The company is expected to earn $14.65/share in 2024.

The stock sells for 18.60 times forward earnings and yields 2.08%.

Horace Mann Educators Corporation (HMN) operates as an insurance holding company in the United States. The company operates through Property & Casualty, Life & Retirement, and Supplemental & Group Benefits segments.

The company increased quarterly dividends by 3% to $0.34/share. This is the 16th consecutive year the Board has increased the annual shareholder cash dividend.

Over the past decade, the company has managed to increase dividends at an annualized rate of 5.40%.

Between 2014 and 2023 the company's earnings went from $2.50/share to $1.09/share. The company is expected to earn $3.19/share in 2024. The earnings stream is volatile.

The stock sells for 11 times forward earnings and yields 3.87%.

Kadant Inc. (KAI) supplies technologies and engineered systems worldwide. It operates in three segments: Flow Control, Industrial Processing, and Material Handling. 

The company increased quarterly dividends by 10.30% to $0.32/share. This is the 12th consecutive annual dividend increase for this dividend achiever.

Over the past decade, the company has managed to increase dividends at an annualized rate of 16.28%.

The company has managed to increase earnings from $2.61/share in 2014 to $9.92/share in 2023. Kaidant is expected to earn $9.98/share in 2024.

The stock sells for 32.76 times forward earnings and yields 0.35%.

QUALCOMM Incorporated (QCOM) engages in the development and commercialization of foundational technologies for the wireless industry worldwide. It operates through three segments: Qualcomm CDMA Technologies (QCT); Qualcomm Technology Licensing (QTL); and Qualcomm Strategic Initiatives (QSI).

The company increased quarterly dividends by 6.30% to $0.85/share. This is the 22nd consecutive annual dividend increase for this dividend achiever.

Over the past decade, the company has managed to increase dividends at an annualized rate of 9.25%.

Between 2014 and 2023, the company managed to grow earnings per share from $4.73/share to $6.47/share. 

The company is expected to earn $9.70/share in 2024.

The stock sells for 17.60 times forward earnings and yields 2%.

SpartanNash Company (SPTN) distributes and retails grocery products in the United States of America. It operates through Wholesale and Retail segments.

The company increased quarterly dividends by 1.20% to $0.2175/share. This is the fourteenth consecutive annual dividend increase for this dividend achiever.

Over the past decade, the company has managed to increase dividends at an annualized rate of 9.40%.

The company's earnings per share basically went nowhere over the past decade. The company earned $1.56/share in 2014 and $1.53/share in 2023.

The company is expected to earn $2.01/share in 2024.

The stock sells for 10.23 times forward earnings and yields 4.23%.

Trinity Industries, Inc. (TRN) provides rail transportation products and services under the TrinityRail name in North America. It operates in two segments, Railcar Leasing and Management Services Group, and Rail Products Group. 

The company increased quarterly dividends by 7.70% to $0.28/share. This is the fifteenth consecutive annual dividend increase for this dividend achiever.

Over the past decade, the company has managed to increase dividends at an annualized rate of 15.32%.

Earnings per share over the past decade actually declined from $4.35/share in 2014 to $1.27/share in 2023. The company is expected to generate $1.42/share in 2024.

The stock sells for 18.50 times forward earnings and yields 4.26%.

Relevant Articles:

- Four Dividend Growth Stocks Rewarding Shareholders With Raises Last Week

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17 Dividend Growth Stocks Raising Shareholder Distributions

As a shareholder, there are two ways to make profits from a stock. 

The first way is when you sell your stock for a gain, after it has increased above your purchase price. The downside is that once you sell your stock, you will not be able to participate in any further upside. If you hold patiently however, you will experience a surge in net worth if the business succeeds. 

The second way is when a stock you own distributes a dividend. A company typically distributes a dividend after carefully evaluating its business needs. If a business does not find enough good opportunities to deploy profits at high rates of return, then the rational thing to do is to distribute it to shareholders. Some businesses are able to both grow earnings and dividends. 

There are over 530 businesses in the US, which have managed to increase dividends to shareholders for at least a decade. I try to monitor most of them, in an effort to review existing holdings, and uncover companies for further research. 

My monitoring process involves different steps. I regularly screen the investable universe, using my criteria, before reviewing promising candidates. I also review some major news like filings and dividend increases as well for a narrower view of the universe.

For example, last week, there were 58 US companies that raised dividends. Of those companies, only 17 had managed to grow dividends for at least 10 years in a row. You can view this list below:

As part of my review, I look at the size of the increase and compare it to the five and ten year average. I also review the trends in earnings per share, in order to determine if the track record of dividend growth was from a solid base.

I like reviewing trends in payout ratios, in order to determine dividend safety. This of course is best done in conjunction with reviewing of earnings per share.

Last but not least, I also review valuation, in order to determine if a company is worth reviewing today for a potential acquisition.

You may like this old analysis of Eaton Corporation from 2015, on the steps I take to review a company.

Relevant Articles:

- 16 Dividend Growth Companies That Increased Dividends Last Week

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