SCHD: How Does The 3.43% Yielding Dividend ETF Stack Up To Competition?

The Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) was one of the first dividend-focused ETFs I ever invested in. My initial research indicated that SCHD provided investors with an interesting synergy between capital appreciation and a larger than average dividend yield. Many if not all index and total market funds generate minimal yields as their primary investment objective is capital appreciation. In the basket of ETFs, I had invested in I wanted some that would generate capital appreciation while throwing off a bit more income. For instance, the Vanguard S&P 500 ETF (VOO) has a yield of 1.63%, while the Vanguard Total Stock Market ETF (VTI) yields 1.61%. I don’t remember where SCHD’s yield was when I initially invested in it, but I want to say it was around 2.98%.

With the markets declining, the Nasdaq deep in a bear market, and the S&P 500 moving in and out of a bear market, I wanted to look at SCHD’s progress and see how it’s stacking up against the competition. I still own SCHD in addition to several other dividend-focused ETFs to which I will be comparing it. SCHD closed at $71.81 on 7/15, and its trailing dividend of $2.43 places its yield at 3.38%. Nobody can accurately say if today is the start of an extended rally, if it was a dead cat bounce that will ultimately end up as a lower high during the downturn, or if we are going to trade sideways for an extended period of time. For long-term investors, I think that the previous several months have offered some interesting buying opportunities. I believe SCHD is a good dividend ETF to ride out the storm in as it should benefit when the markets rebound.

An overview of SCHD’s investment strategy

SCHD generally invests in stocks that are included in the Dow Jones U.S. Dividend 100 index. The 100-component index is a subset of the Dow Jones U.S. Broad Market Index, excluding real estate investment trusts (REITs), master limited partnerships, preferred stocks, and convertibles. There are two primary characteristics that qualify a company to be eligible for this index. Each equity must have a minimum of ten consecutive years of dividend payments and a minimum float-adjusted market capitalization of $500 million. The components of the index are evaluated by the highest dividend-yielding stocks based on cash flow to total debt, return on equity, dividend yield, and 5-year dividend growth rate. The index has individual investment rules where individual equities can’t exceed 4%, and a specific sector can’t exceed 25% of the fund.

SCHD constructs its investment portfolio from the companies within the Dow Jones U.S. Dividend 100 index. SCHD invests at least 90% of its assets in these equities and utilizes cash-flow to debt ratio, ROE, dividend yield, and dividend growth rate to make its decisions. SCHD is rebalanced quarterly to make sure its positions meet the 4% and 25% criteria, and the overall composition is reviewed on an annual basis. Within SCHD’s top 10 holdings, you will find companies such as Merck & Co. (MRK), PepsiCo (PEP), International Business Machines (IBM), Coca-Cola (KO), Verizon (VZ), and Pfizer (PFE).

Reviewing how SCHD has stacked up to similar dividend funds and the S&P 500 index in capital appreciation and dividends

SCHD isn’t a high-yielding income investment such as a Covered-Call ETF. It’s more of a hybrid investment to capture both capital appreciation and elevated yields. I will evaluate how SCHD is performing in both categories compared to similar funds. For SCHD’s peer group, I have selected the following funds:

For an S&P 500 index fund and a Total Market Fund I have selected:

As SCHD is a Dividend ETF, I will start with the dividend yield. The average dividend yield of the group is 2.86%, with SPY yielding 1.58% and VTI yielding 1.56%. Traditional index and total market funds are not designed for larger than average yields and would be expected to come in at the lower end of the group range. SPYD tops the list with a 3.96% yield. SCHD takes 3^rd place with a 3.38% yield which is significantly above the group average.

SCHD came in 3^rd on the dividend component and above the group’s average yield; it’s time to look at capital appreciation as the next metric. I will admit that when I saw the 5-year results, I closed my webpage and ran the comparison again to ensure there wasn’t an error. Over the past 5-years, SCHD has been #1 in capital appreciation. SCHD has appreciated by 57.62% over the previous 5-years, which is 1.62% more than SPY. DGRO and SPY had higher peaks during the bull cycle, but as it stands, SCHD has appreciated more at this point in time over a 5-year period. In all fairness, if I had written this article several months earlier, SCHD would have been in 3^rd place for capital appreciation which would have still been excellent.

Looking at a 1-year period, SCHD has declined by -5.56%, which is more than the group’s average of -4.05%. SPY and VTI have declined by double digits, so SCHD outperforms both an index and total market fund during a bear market. This should provide a level of comfort to investors as SCHD is proving to mitigate downside losses quite well compared to index and total market funds.

Looking at the charts on a YTD basis is similar to what the 1-year charts looked like. SCHD has declined by -11.14%, which is just outside the group’s average of -10% but well ahead of SPY and VTI. SPY has declined by -19.42% YTD, while VTI has declined by -20.77% YTD. SCHD is providing more than double the yield on a percentage basis and just under half of the downside compared to SPY and VTI.

SCHD’s dividend history and fund profile

After comparing SCHD’s dividend and capital appreciation, it gets a passing mark by my standards in both categories. I want to look at SCHD’s dividend history to see what the trend is. While SCHD’s quarterly dividend payment varies, SCHD has delivered 10 years of consecutive dividend growth. SCHD’s 5-year dividend growth rate is 13.32%. There isn’t much more to ask for from a dividend fund, SCHD’s yield is more than double typical index funds, and there is substantial growth in both years and annually.

SCHD has $34.43 billion in total net assets spread out across 104 holdings. SCHD has a passive management style, and its Morningstar category is Large Value. There is an ultra-low expense ratio of 0.06%. The average weighted market cap within SCHD is $126.84 billion with a 15.74 P/E and 11.45 P/Cash Flow. SCHD is a large fund that invests in many of the market’s largest companies and charges next to nothing as a management fee.

Conclusion

If you’re looking for an ETF that can deliver modest capital appreciation, mitigate downside risk, and produce above-average income, look no further than SCHD. This fund has a proven track record of generating a growing dividend that outpaces index funds while mitigating losses throughout declining markets. After comparing SCHD to other dividend and index/total market funds, it outperformed on every metric. SCHD is yielding 3.38%, has currently delivered more capital appreciation over the previous 5-years compared to SPY, and has declined significantly less than SPY in 2022. SCHD can deliver income in any investment cycle it has been faced with while creating a long-term track record of appreciation.