SCHD ETF Review: Dividend Yield, Holdings, & Performance

SCHD ETF Review: Dividend Yield, Holdings, & Performance

The Schwab US Dividend Equity ETF (SCHD) is a perennial favorite among dividend investors, and for good reason. It consistently ranks high in lists of top dividend ETFs, boasting a compelling combination of above-average yield, low expense ratio, and a track record of strong risk-adjusted returns. This article provides a detailed review of SCHD, covering its dividend yield, holdings, performance, and overall investment thesis.

I. Investment Objective and Strategy

SCHD’s primary objective is to track the total return of the Dow Jones U.S. Dividend 100 Index. This index is not simply a list of the highest-yielding stocks. Instead, it uses a multi-faceted screening process designed to select high-quality, sustainable dividend payers. This is a crucial distinction that separates SCHD from many other dividend ETFs. The index methodology focuses on the following key factors:

• 10-Year Dividend Payment History: Companies must have paid dividends for at least 10 consecutive years. This requirement screens out companies with volatile or unreliable dividend histories.
• Minimum Market Capitalization: Companies must meet a minimum market capitalization threshold (currently $500 million) to ensure sufficient liquidity and avoid very small-cap companies.

• Financial Strength Metrics: The index utilizes four fundamental-based screens:

  • Free Cash Flow to Total Debt: Measures a company’s ability to cover its debt obligations with its free cash flow. Higher is better.
  • Return on Equity (ROE): Measures profitability relative to shareholder equity. Higher ROE generally indicates a more efficient and profitable company.
  • Indicated Dividend Yield: This helps ensure that the ETF provides a meaningful yield, but importantly, it’s not the only factor.
  • 5-Year Dividend Growth Rate: This considers the historical dividend growth rate, favoring companies that have consistently increased their payouts.

• Weighting Methodology: After applying these screens, the remaining stocks are ranked by indicated annual dividend yield. The top 100 stocks are selected. The index is modified market capitalization-weighted, meaning larger companies generally have a larger weighting, but with a crucial caveat: no single stock can exceed 4.0% of the index, and no single sector (as defined by the Industry Classification Benchmark) can exceed 25% at the time of the annual reconstitution. This helps ensure diversification and prevents over-concentration in any one company or sector. The index is reviewed quarterly and rebalanced annually in March.

II. Dividend Yield

One of SCHD’s main attractions is its attractive dividend yield. The yield fluctuates based on market conditions and the underlying holdings’ dividend payouts.

• Current Yield (as of October 26, 2023): Approximately 3.8%. This is significantly higher than the yield of the S&P 500 (typically around 1.5-2%). Keep in mind that this is a trailing twelve-month yield and may not perfectly predict future yields.
• Historical Yield: Historically, SCHD’s yield has generally ranged between 3% and 4%, making it consistently appealing to income-seeking investors.
• Dividend Growth: SCHD has a strong history of dividend growth. While past performance doesn’t guarantee future results, the index methodology, with its focus on dividend growth, is designed to support continued increases in payouts over time. Over the past 5 years, the dividend growth has averaged around 12% per year.
• Distribution Frequency: SCHD pays dividends quarterly (March, June, September, December).

III. Holdings

SCHD typically holds around 100 stocks, diversified across various sectors. The top holdings and sector allocations can shift slightly with each rebalancing, but the overall composition tends to remain relatively stable.

• Top 10 Holdings (as of recent data, subject to change): These often include well-established, blue-chip companies with strong dividend track records. Examples may include (but are not limited to):

  • Broadcom Inc. (AVGO)
  • Texas Instruments (TXN)
  • Amgen Inc. (AMGN)
  • AbbVie Inc. (ABBV)
  • The Home Depot, Inc. (HD)
  • Merck & Co., Inc. (MRK)
  • Chevron Corporation (CVX)
  • PepsiCo, Inc. (PEP)
  • Coca-Cola Company (KO)
  • Cisco Systems Inc. (CSCO)

  It is crucial to check the official Schwab website for the most up-to-date holdings list, as this changes.

• Sector Breakdown: SCHD generally has a significant weighting in sectors known for dividend payouts, such as:

  • Industrials: Often a significant allocation due to the presence of established companies with stable cash flows.
  • Financials: Banks and insurance companies can be significant dividend payers, although this sector can be more sensitive to economic cycles.
  • Consumer Staples: Companies producing essential goods tend to have relatively stable earnings and dividends, even during economic downturns.
  • Health Care: Pharmaceutical and healthcare equipment companies can offer attractive dividends and growth potential.
  • Information Technology: While often associated with growth, some established tech companies have become significant dividend payers.

  The sector breakdown is designed to be relatively balanced, with the 25% sector cap preventing over-concentration.

• Diversification: The 4% cap on individual holdings and the 25% cap on sector allocations provide good diversification, reducing the risk associated with any single company or sector performing poorly.

IV. Performance

SCHD has a strong track record of delivering competitive returns, particularly when considering its risk profile.

• Total Return: Historically, SCHD has provided total returns (including dividends) that are competitive with the S&P 500, especially on a risk-adjusted basis. It’s important to compare performance over various time periods (e.g., 1-year, 3-year, 5-year, 10-year, since inception) to get a comprehensive view.
• Risk-Adjusted Returns: SCHD often exhibits lower volatility than the broader market, as measured by metrics like standard deviation and beta. This is partly due to its focus on established, financially sound companies. This makes it potentially more suitable for investors who are risk-averse or seeking income with less price fluctuation.
• Expense Ratio: SCHD has an extremely low expense ratio of 0.06%. This means that only $6 of every $10,000 invested goes towards fund expenses, making it one of the most cost-effective dividend ETFs available.
• Comparison to Peers: SCHD consistently performs well compared to other dividend-focused ETFs. It’s important to compare it to other ETFs with similar objectives, considering factors like yield, expense ratio, holdings, and performance. Some common comparisons include Vanguard Dividend Appreciation ETF (VIG), iShares Core Dividend Growth ETF (DGRO), and SPDR Portfolio S&P 500 High Dividend ETF (SPYD). However, SCHD’s unique screening process and weighting methodology set it apart.

V. Pros and Cons

Pros:

• Attractive Dividend Yield: Consistently provides a higher yield than the broader market.
• Low Expense Ratio: One of the lowest in its category.
• High-Quality Holdings: Focus on companies with strong financials and a history of dividend payments.
• Good Diversification: Caps on individual holdings and sector allocations reduce concentration risk.
• Strong Performance: Competitive total returns and lower volatility compared to the S&P 500.
• Transparent Methodology: The index rules are clearly defined and publicly available.
• Tax Efficiency: Generally tax-efficient due to its focus on qualified dividends.

Cons:

• Potential Underperformance During Bull Markets: During periods of rapid market growth, particularly driven by growth stocks, SCHD may underperform the S&P 500, as it prioritizes dividend-paying companies over pure growth companies.
• Sector Concentration Risks (Despite Caps): While sector caps limit over-concentration, the fund may still have significant exposure to specific sectors, making it vulnerable to sector-specific downturns.
• Dividend Cuts are Possible: While the screening process aims to select companies with sustainable dividends, there’s always a risk that a company in the index could cut or eliminate its dividend.
• Not a Growth ETF: Investors primarily seeking capital appreciation might find other ETFs more suitable. SCHD is designed for income and moderate growth.

VI. Conclusion

The Schwab US Dividend Equity ETF (SCHD) is a well-regarded dividend ETF that offers a compelling combination of attractive yield, low cost, and a focus on high-quality, dividend-paying companies. Its rigorous screening process, diversified holdings, and strong track record make it a suitable option for income-seeking investors, particularly those who are somewhat risk-averse. However, it’s important to understand that SCHD is not designed to outperform the S&P 500 in all market environments, particularly during strong bull markets driven by growth stocks. As with any investment, potential investors should carefully consider their own investment goals, risk tolerance, and time horizon before investing in SCHD. It’s also crucial to conduct thorough research and consult with a financial advisor if needed.