If a Stock Market Crash Is Coming, History Says SCHD’s Dividend Grew Through the Last Two Bear Markets. But Here’s the Catch I’m Watching.

Why the payout held up during bear markets

The slowdown doesn’t erase why SCHD’s payout held up in the past. The ETF tracks the Dow Jones U.S. Dividend 100 Index, which screens for yield, five-year dividend growth, and financial strength. The index also revamps its holdings once a year, swapping out companies that no longer measure up.

The ETF holds many large companies with long histories of dividend growth. Its top holdings include Procter & Gamble and Coca-Cola. Big, established businesses like these tend to have the cash flow and financial strength to keep paying through a downturn. Procter & Gamble has raised its dividend for 70 straight years, while Coca-Cola is up to 64 straight years. They’re both Dividend Kings, companies with 50 or more years of annual dividend increases.

What could happen to SCHD if there’s another crash?

If the last two crashes are any indication, SCHD’s dividend will likely keep rising while its share price would probably decline during a market slump. Depending on the catalyst, it might decline less than the S&P 500, due to the more defensive nature of its holdings, its strong dividend income, and its current valuation (at 18.2 times earnings, it’s cheaper than the S&P 500 at 23.6 times earnings).

That’s not a bad combination if you’re collecting dividends. SCHD currently has a trailing 12-month yield of more than 3%. If its share price declines while its payout continues to rise, investors could lock in an even higher yield on newly purchased shares, enabling them to generate even more dividend income in the future.

What I’m watching

I’m not selling SCHD because a stock market crash could be coming, as the ETF’s history gives me some comfort. It has historically continued paying a higher dividend, even though its share price has taken a hit. However, the catch is that dividend growth has significantly slowed more recently despite a solid economic environment. That’s why I’ll be watching its next payout announcement in December to see if the slowdown is just a temporary blip or something more concerning.

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Matt DiLallo has positions in Coca-Cola, Procter & Gamble, and Schwab U.S. Dividend Equity ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

If a Stock Market Crash Is Coming, History Says SCHD’s Dividend Grew Through the Last Two Bear Markets. But Here’s the Catch I’m Watching. was originally published by The Motley Fool