SCHD is a popular dividend ETF from Schwab to capture profitable U.S. stocks with a sustainable dividend. But is it a good investment? I review it here.
First, note that I don’t chase dividends. But I recognize that many investors use dividends to supplement their current income, particularly in retirement. Others just irrationally prefer dividend-paying stocks. I even designed a dividend-focused portfolio for income investors that uses SCHD as its primary holding; I’ll explain why below.
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SCHD Methodology, Factors, Fees, and Dividend Yield
SCHD is the Schwab U.S. Dividend Equity ETF. The fund is a very popular dividend ETF from Schwab that launched in late 2011. Since then, the fund has amassed over $35 billion in assets.
SCHD has a little over 100 holdings and aims to capture companies with a reliable dividend history and robust profitability. Its market cap weighted index is the Dow Jones U.S. Dividend 100 Index. SCHD can be described as a large cap value fund. On average, larger stocks are more stable, are less risky, and have more predictable cash flow than smaller stocks. Value stocks have also outperformed growth stocks historically due to what we believe is a risk premium.
Though it may appear so at first glance, SCHD is not just your typical, simple dividend fund. It first looks for companies with 10 years of consecutive dividend payment history and a minimum market cap of $500 million. SCHD then employs fundamental earnings screens like return on equity, dividend growth rate, and debt to equity ratios to attempt to capture high-quality companies with strong profitability that can pay a sustainable dividend going forward. Individual holdings are capped at 4%, and sectors at 25%. Also note that SCHD excludes REITs entirely.
SCHD delivers appreciable exposure to equity risk factors like Profitability and Investment, as well as non-trivial exposure to the Value factor. These are independent sources of risk that explain the differences in returns between diversified portfolios. I delved into factors in a separate post here. As I’ve noted elsewhere, the historical success of dividend investing as a whole is largely rooted in these factor premia.
Essentially, SCHD is a pretty decent factor fund that’s not really a factor fund and, in my opinion, is a strong contender for the best dividend fund out there. That’s why I made it the primary holding in the dividend portfolio I designed for income investors.
SCHD also happens to be one of the cheapest dividend funds out there with a fee of only 0.06%.
At the time of writing, SCHD has a dividend yield of 3.03%. As I hinted at earlier, this certainly isn’t the highest yielding fund out there, but it should be one of the more stable, reliable ones.
SCHD Sector Composition
For being a large cap dividend fund, SCHD is pretty well diversified across sectors aside from a negligible weight to Utilities and its excluding REITs entirely. But the fund naturally tilts toward some traditionally “defensive” sectors like Consumer Staples and Industrials.
Going back to 2011 when SCHD launched and looking through 2021, it has outperformed its closest peers VYM, VIG, and HDV on both a general and risk-adjusted basis:
In conclusion, SCHD may very well be the best dividend fund out there for U.S. investors who don’t care about missing out on REITs, mid-caps, and small-caps. Its factor exposure is not insignificant.
Conveniently, SCHD should be available at any major broker, including M1 Finance, which is the one I’m usually suggesting around here.
What do you think of SCHD? Let me know in the comments.
Disclaimer: While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.
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