To The Moon

$Schwab US Dividend Equity ETF(SCHD)$

If you're seeking a efficient way to invest in a stable fund that delivers both strong growth and reliable income, SCHD might be the perfect choice. As one of the most popular dividend ETFs on the market, SCHD stands out for its unique blend of performance and stability. In this article, I'll dive into what SCHD is, how it works, and how it compares to other alternatives.

What is SCHD?

SCHD stands for the Schwab U.S. Dividend Equity ETF, managed by Charles Schwab. The fund aims to closely track the total return of the Dow Jones U.S. Dividend 100 Index. The "100" in its name refers to the 100 high-dividend-yielding companies it includes, offering investors exposure to a broad portfolio with just one purchase.

This index is specifically designed to measure the performance of U.S. stocks with a strong track record of consistently paying dividends. However, these companies aren’t chosen arbitrarily or by a fund manager’s discretion. Instead, they must meet strict criteria to be included in SCHD:

• 10+ Years of Dividend Payments: A minimum of 10 consecutive years of dividend history.

• Market Cap & Trading Volume: A float-adjusted market capitalization of at least $500 million and a 3-month average daily trading volume of $2 million.

• Ranking Metrics: Companies are further ranked based on four fundamental characteristics: free cash flow to debt, return on equity, annual dividend yield, and 5-year dividend growth rate.

Weighting and Sector Limits

To ensure diversification, no single stock can make up more than 4% of the index, and no sector can exceed 25%. Currently, the top holdings include well-known companies like Fiserv, BlackRock, Coca-Cola, and Lockheed Martin. The fund's top sectors are financials (18%), healthcare (16%), and consumer staples (14%).

With this solid framework, SCHD offers a reliable and diversified approach to dividend investing. Let’s now compare it to other options available in the market.

Why Consider SCHD?

SCHD is a fund comprising 100 strong dividend-paying companies, offering a unique value proposition. Notably, the top 10 holdings account for approximately 41% of the fund, a higher concentration compared to alternatives. Despite this, SCHD provides exceptional diversification, with only a 7% overlap with the S&P 500 (e.g., VO). This makes it an appealing option for those heavily invested in the S&P 500, especially if you want to diversify away from tech-heavy stocks like Apple, Nvidia, and Microsoft.

Dividend Growth and Yield

Over the past 12 months, SCHD delivered a 3.88% dividend yield, with a growth rate of 12.23%. Following its recent share split, the fund is priced at roughly $27 per share, translating to $0.26 per quarterly dividend per share. For instance, a $10,000 investment at the current rate would generate $361 annually in dividends. Furthermore, SCHD’s 100% qualified dividend income in 2023 allows investors to potentially benefit from long-term capital gains tax rates of 0%, 15%, or 20%.

Low Expense Ratio

SCHD’s expense ratio is just 0.06%, a significant cost-saving advantage over actively managed funds like JPI, which has a 0.35% expense ratio and pays non-qualified dividends. These lower fees contribute to long-term savings and higher net returns, particularly in tax-advantaged accounts like a Roth IRA.

Historical Performance

SCHD has demonstrated strong and consistent growth:

• 1-Year Growth: 27.1%

• 3-Year Average Annual Growth: 13.1%

• 5-Year Average Annual Growth: 11.7%

• 10-Year Average Annual Growth: 11.7%

With over 10 years of historical data, SCHD stands out compared to newer funds, which may have benefited from the recent tech boom.

Stability and Tax Efficiency

SCHD’s worst year in the past decade saw a decline of only 5.2%, outperforming the S&P 500’s 8% decline during its worst year in the same period. Its high dividend yield, tax efficiency, and lower volatility make it a reliable choice for long-term investors seeking income and stability.

Comparison with Other Funds

While funds like JPI offer higher dividend yields (e.g., 8%), their lower growth and non-qualified dividend status can make them less tax-efficient. For instance, JPI’s performance over the past three years has struggled to keep pace with inflation, underscoring the importance of selecting funds aligned with your goals.

Building a Defensive Portfolio

SCHD serves as an excellent foundation for a dividend-focused defensive portfolio. It pairs well with other funds like FDVV, DGRO, and DGRW to enhance diversification. However, always pay attention to the qualified dividend status to avoid surprises during tax season. Depending on your strategy, you might prioritize dividend income, growth, or a combination of both.

SCHD vs. Competitors

When comparing SCHD to its top competitors, let’s start with the Fidelity High Dividend ETF (FDVV).

Fidelity High Dividend ETF (FDVV)

FDVV tracks the Fidelity High Dividend Index, which focuses on large- and mid-cap dividend-paying companies with strong potential for dividend growth. It includes 111 holdings, with top companies like Nvidia, Apple, and Microsoft, each accounting for 5-6% of the fund’s weight. Together, the top 10 holdings make up about 30% of the fund.

• Sector Breakdown: Information Technology leads at 25%, contributing to FDVV’s 39% overlap with the S&P 500 (VOO).

• Expense Ratio: 0.16%, the highest among the funds covered in this video.

• Dividend Yield: 2.91% over the past 12 months, but dividends declined by 7.66% in the same period. With a share price around $50, FDVV pays $0.48 per quarter. If you invest $10,000 at this rate, you’d earn $291 annually in dividends.

• Tax Efficiency: 74% of dividends in 2023 were classified as qualified dividends, meaning they are eligible for lower long-term capital gains tax rates.

• Performance: Over the past year, FDVV grew 37.8% (including reinvested dividends), with 3- and 5-year annualized returns of 12.67% and 14.31%, respectively. However, it lacks a 10-year track record, having launched in 2016.

iShares Core Dividend Growth ETF (DIVB)

Another strong competitor is the iShares Core Dividend Growth ETF (DIVB), which tracks the Morningstar U.S. Dividend and Buyback Index. This fund includes 420 holdings, with top companies like Texas Instruments, JPMorgan Chase, ExxonMobil, and Verizon. The top 10 holdings account for about 28% of the fund.

• Sector Breakdown: Information Technology leads at 22%, followed by Financials and Industrials. The fund has a 29% overlap with the S&P 500.

• Expense Ratio: 0.05%, making it one of the most cost-efficient options.

• Dividend Yield: 2.58% over the past 12 months, with dividends declining by 5.3%. At a share price of around $48, DIVB pays $0.35 per quarter.

• Tax Efficiency: In 2023, 97% of dividends were qualified, offering better tax efficiency compared to FDVV.

• Performance: DIVB grew 33.77% in the past year, with 3- and 5-year annualized returns of 10.2% and 14.2%, respectively. However, it only dates back to 2017 and experienced a worst-year decline of 10.5%.

Key Takeaways

While both FDVV and DIVB are strong contenders, SCHD remains a standout due to its:

1. Lower Overlap: SCHD has just a 15% overlap with FDVV, making it a complementary choice for diversification.

2. Long-Term Track Record: SCHD has more than a decade of historical performance, unlike FDVV and DIVB, which lack 10-year data.

3. Strong Dividend Growth: SCHD provides high dividend income and growth potential, making it an excellent foundational choice for a dividend-focused portfolio.

If you’re building a diversified portfolio, combining funds like SCHD, FDVV, or DIVB might suit your goals, but it’s essential to evaluate overlap and tax efficiency.

Conclusion:

SCHD’s high dividend income, reduced volatility, tax efficiency, and consistent growth make it an excellent choice for investors looking to diversify away from tech-heavy investments and build a stable, income-focused portfolio. While it may not match the long-term growth of the S&P 500, its unique benefits provide a compelling case for inclusion in a well-rounded investment strategy.

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