SCHD: Is it Still the King of Dividend ETFs?
"Do not take yearly results too seriously. Instead, focus on four or five-year averages." - Warren Buffett
Is SCHD losing its shine, or is it simply a blip in its stellar track record?
The recent underperformance of the Schwab U.S. Dividend Equity ETF (SCHD) has investors second-guessing its royalty status in the realm of dividend ETFs.
But is this concern warranted? As we delve into the world of dividends, share prices, and bear markets, join us on an insightful journey exploring SCHD's past and present performance.
We'll also unravel the implications of its annual 'reconstitution' and what that might mean for your portfolio.
Whether you're a seasoned investor or just dipping your toes into the dividend ETF pool, this comprehensive review promises to illuminate your path forward.
Stick with us till the end, as we reveal why despite its current hiccup, SCHD might still be a crown jewel in your dividend portfolio.
Whats Going On?
The popularity of SCHD stems from its impressive track record, having surged over 42.3% in the past five years and 112% in the past decade.
Adding to its appeal is its larger-than-average dividend yield which currently stands at 3.74%.
Equally important, SCHD has demonstrated consistent dividend growth rates, with three-year, five-year, and ten-year compounded annual growth rates at 13.3% respectively.
The fund's resilience during bear markets is another point in its favor.
While the S&P 500 dropped approximately 18-19% in 2022, SCHD fell by only 3.23%, significantly outperforming the market.
However, SCHD has been underperforming this year, down about 6.5%, while the S&P 500 is up around 8.4%. The gap remains substantial even when accounting for total returns, which include dividends.
A deep dive into the S&P 500 year-to-date heat map reveals that tech giants such as Microsoft and Apple have been delivering exceptional performances, which has disproportionately benefited the S&P 500 due to their sizable representation. Meanwhile, SCHD’s tech holdings amount to only 12.66% of its total holdings.
To fully assess SCHD's current underperformance, it's crucial to understand that the fund undergoes an annual 'reconstitution' in March, wherein it adjusts its stock holdings.
SCHD Removing Tech?
A comparison of SCHD's current and old sector allocations reveals significant shifts, with technology and healthcare making up over 20% of holdings in the past, potentially bolstering SCHD's historical performance and dividend growth.
However, the fund’s current allocation may limit its capacity for share price appreciation and dividend growth in the future.
Notably, around 54% of SCHD’s total holdings boast dividend yields of over 4%, typically associated with lower dividend growth rates.
For instance, Verizon, a prominent holding in SCHD, has an attractive dividend yield of 7.2%, but its dividend growth rate lags behind inflation.
In spite of these concerns, SCHD remains one of the best dividend ETFs available.
Nevertheless, it might be beneficial for the fund to reposition closer to its past sector allocation, increasing stakes in technology and healthcare sectors.
This could lead to a slight dip in the current starting dividend yield, but likely would enhance share price appreciation and long-term dividend growth.
To conclude, SCHD still holds a prominent place in the world of dividend ETFs.
However, like all investments, it merits close scrutiny and flexibility to adapt to its changing performance and strategy.
Wrapping up
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