SCHD's Healthcare Bet: A Mixed Bag for Dividend Investors

The Schwab U.S. Dividend Equity ETF (SCHD) is an investment fund that tracks the Dow Jones U.S. Dividend 100 Index, which screens companies for dividend quality.

Its screens include financial metrics such as dividend yield and five-year dividend growth rate, and reconstitute its holdings each year.

SCHD's current portfolio has a surprising allocation of 20.7% to healthcare stocks, with Merck and UnitedHealth being its two largest holdings in this sector.

However, some experts are raising quality concerns about these companies, as they face notable headwinds: Merck's biggest revenue driver may lose patent exclusivity in 2028, while UnitedHealth has struggled with growth and earnings volatility.

Despite these concerns, SCHD's fund managers have said that the two holdings still passed the stringent screens required for inclusion in the index and are expected to be replaced if their quality declines.