3 Stocks to Buy From One of America’s Top Dividend ETFs

Stocks to buy

Morningstar.com believes that the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) is one of the better ETFs for dividend-focused investors. It stands to reason that if you’re interested in dividend stocks to buy, SCHD is an excellent source of ideas.

The ETF tracks the performance of the Dow Jones U.S. Dividend 100 Index, a collection of solid businesses that have increased their dividends for 10 consecutive years. 

“Entering March 2024, nearly 65% of the portfolio represented stocks with wide Morningstar Economic Moat Ratings, a higher share than 96% of Morningstar Category peers,” stated Morningstar.com contributor Ryan Jackson on May 20. 

“Quality doesn’t come cheap, but focusing on the higher-yielding half of the market and tilting toward mature franchises land the fund in the large-value category.”

To select the three dividend stocks from SCHD, I’ll look for companies with price-to-earnings (P/E) ratios lower than 15.92x, price-to-cash-flow (P/CF) ratios lower than 9.46x, and price-to-book (P/B) ratios less than 3.07.

Chevron (CVX)

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Chevron (NYSE:CVX) is the sixth-largest holding of SCHD, with a weight of 4.08%. Its P/E, P/CF, and P/B ratios are 14.51x, 7.75x, and 1.80x, respectively.   

The most significant risk in buying CVX was Hess’ (NYSE:HES) impending vote on May 28 by shareholders to approve its sale to Chevron for $53 billion. When the deal was announced last fall, it seemed like a sure thing. In recent weeks, however, investor support had waned. Fortunately, reports suggest Hess got the majority of yes votes needed to close the sale.  

Between a regulatory review from U.S. regulators and an arbitration challenge from Exxon Mobil (NYSE:XOM), investors aren’t convinced Chevron will complete the deal. A rejection by Hess shareholders would have most certainly knocked CVX stock for a slight fall. Up just 4% over the past year, a rejection would push into negative territory for the past 52 weeks.

As InvestorPlace contributor Faisal Humayun wrote in late April, the company generated $6.8 billion in operating cash flow in the first quarter of 2024. It’s on target for over $30 billion in 2024. That’s without Hess in the mix. 

Yielding 4.1%, it’s an excellent income play for dividend-focused investors. 

Verizon Communications (VZ)

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Verizon Communications (NYSE:VZ) is the eighth-largest holding of SCHD, with a weight of 3.90%. Its P/E, P/CF, and P/B ratios are 14.88x, 4.38x, and 1.78x, respectively. 

Although I’ve said in a past commentary that I favor T-Mobile (NASDAQ:TMUS) over Verizon and AT&T (NYSE:T),I think it’s the best-run of the three businesses, since it’s hard to ignore Verizon’s 6.7% dividend yield. 

Analysts are lukewarm about its stock. Of the 27 that cover these VZ, 13 rate it a buy, with a target price of $45.50, 16% higher than where it’s currently trading. It trades at 8.4x its 2025 earnings per share estimate of $4.71. 

One of the highlights of its Q1 2024 results was a 17.4% increase in its free cash flow in the quarter to $2.7 billion. Its trailing 12-month free cash flow is $13.44 billion. Investors can expect it to increase over the final three quarters of 2024. 

“Our strong results show that our team is delivering. Our performance in the first quarter sets us up for a successful 2024,” said Verizon Chairman and CEO Hans Vestberg. “We are on track to meet our financial guidance and to deliver positive Consumer postpaid phone net adds for the year.”

If income is a big consideration, Verizon makes sense.

Ford (F)

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Ford (NYSE:F)  is the 19th-largest holding of SCHD, with a weight of 2.01%. Its P/E, P/CF, and P/B ratios are 12.54x, 3.76x, and 1.13x, respectively. 

As I write this, Ford’s share price is $11.90, down 2% on the year and up 25% over the past five years. This is nearly one-quarter the performance of the S&P 500, a major disappointment for long-time Ford shareholders.

While most analysts aren’t exactly excited about Ford stock — of the 28 analysts covering its stock, only 10 rated it a buy, with a target price of $13, 9% higher than where it’s currently trading — Bernstein analyst Daniel Roeska launched coverage of Ford on May 23 with a buy rating and a $16 target price. 

“‘The iconic automaker continues to enjoy strong profits from its core markets and a policy-driven investment cycle in the U.S.,’ added the analyst. ‘While electric execution looms large, we see a clear path to significant operating leverage and ultimately profits for the company’s EV unit,’” Barron’s reported Roeska’s comments.

Every time I see a Ford Mustang Mach-E drive by, I can’t help thinking about where its share price will trade when it gets more EVs on the road that match the Mustang’s good looks and quality product.

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.

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