SCHD Surprisingly Holds Merck and UnitedHealth Amid Healthcare Sector Dominance

The Schwab U.S. Dividend Equity ETF (SCHD) has a significant allocation to healthcare stocks, its top sector weighting at 20.7%. What's surprising is that two of the highest quality healthcare dividend stocks, Johnson & Johnson and Medtronic, are not among its holdings.

Instead, SCHD's largest healthcare stock holdings are Merck and UnitedHealth. These companies have notable headwinds facing them, with Merck struggling to replace revenue lost from patent expirations in 2028, and UnitedHealth dealing with issues related to its Medicare Advantage Program and high costs.

Despite these concerns, the Schwab ETF tracks a strict index that screens for dividend quality. The index has replaced several companies, including Johnson & Johnson and Medtronic, with new holdings like UnitedHealth and Abbott Labs. This reconstitution process occurs annually, and the fund's managers are confident in its ability to continue paying dividends.

The two largest healthcare stock holdings in SCHD have high rankings due to their strong quality metrics. However, if these companies' quality declines, they will be replaced with even higher-quality holdings.