For individuals seeking to learn about analyzing Exchange-Traded Funds (ETFs), I suggest reviewing my earlier post that explains the fundamentals of ETFs and the analysis process.
Schwab U.S. Dividend Equity ETF (SCHD) - Snapshot
Overview
The Schwab U.S. Dividend Equity ETF (SCHD) is a passively managed exchange-traded fund launched by Schwab Asset Management on October 20, 2011. It seeks to track the performance of the Dow Jones U.S. Dividend 100™ Index, which focuses on high-dividend-yielding U.S. companies with strong fundamentals and a consistent history of dividend payments.
Investment Strategy
The index selects U.S. companies that have paid dividends consistently for at least 10 consecutive years, have a minimum float-adjusted market capitalization of $500 million, and meet liquidity criteria. Stocks are then evaluated based on four fundamental metrics: cash flow to total debt, return on equity, dividend yield, and 5-year dividend growth rate. Refer to ‘Composition Methodology’ below for more information.
Top Holdings1 and Sector Allocation2
For more information on these areas, visit Schwab’s SCHD ETF page and my annual reconstitution summary of SCHD.
Risk Level
MEDIUM - Its focus on fundamentally strong, dividend-paying companies reduces volatility compared to growth-oriented ETFs or the broader market (e.g., S&P 500). However, it is not immune to market downturns, and its emphasis on high-yield stocks can lead to underperformance during strong bull markets driven by growth stocks.
The ETF’s beta (a measure of volatility relative to the market) is typically below 1.0, indicating lower volatility than the S&P 500. Concentration in certain sectors introduces some sector-specific risk, but the 25% cap helps manage this exposure.
Expense Ratio
An expense ratio of 0.06% making it cost-effective for investors, which is considered quite low compared to other similar ETFs. For instance:
Invesco QQQ Trust (QQQ) has an expense ratio of 0.20%.
iShares Core Dividend Growth ETF (DGRO) has an expense ratio of 0.08%.
This means that for every $1,000 invested, the annual cost would be $0.60.
Dividend Yield
Typically ranges from 3% to 4%.
This means that if you invest $1,000 in this ETF, you can expect to receive approximately $30 to $40 in dividends over a year, assuming the yield remains constant.
Composition Methodology
For those fond of dividends or engaged in a dividend growth investing strategy, SCHD is an ideal choice. Its growing popularity stems from its distinctive selection process, which underpins the composition of its stock portfolio. Let’s take a look at the index’s rules-based methodology:
Initial Screening: Preference is accorded to companies with a track record of rising dividends, consistent earnings, and robust cash flow, particularly those that are large and well-established. Stocks are initially screened for eligibility based on their dividend yield and overall financial health. This includes:
At least 10 consecutive years of dividend payments.
A minimum float-adjusted market capitalization of $500 million USD.
Meet minimum liquidity criteria.
Financial Metrics: Eligible stocks are evaluated using four key financial metrics:
Cash Flow to Total Debt: This measures a company’s ability to cover its debt with its cash flow.
Return on Equity (ROE): This indicates how efficiently a company is using its equity to generate profits.
Dividend Yield: The annual dividend payment divided by the stock price, indicating the income generated from the investment.
5-Year Dividend Growth Rate: This measures the annualized percentage growth rate of the dividend over the past five years.
Ranking and Selection: Stocks are ranked based on a composite score derived from the above metrics. The top 100 stocks are selected for inclusion in the ETF.
Weighting: The selected stocks are weighted by market capitalization, with additional constraints to ensure diversification:
No single stock can have a weighting greater than 4%.
No sector can have a weighting greater than 25%.
This methodology ensures that SCHD includes companies with strong financial health, consistent dividend payments, and potential for dividend growth.
The Schwab U.S. Dividend Equity ETF (SCHD) conducts a quarterly rebalancing of its portfolio and an annual review of its index composition. This entails adjusting the ETF's weightings four times a year and performing a thorough review once a year, during which stocks may be replaced to maintain alignment with its investment criteria.
Similar Alternatives
If you're looking for similar alternatives, there are several ETFs that share overlapping characteristics, such as a focus on dividends, value, or large-cap stability. Below are some notable options:
Vanguard Dividend Appreciation ETF (VIG): Companies with a history of increasing dividends over time (at least 10 consecutive years).
Vanguard High Dividend Yield ETF (VYM): High-yield dividend stocks from the FTSE High Dividend Yield Index.
iShares Core Dividend Growth ETF (DGRO): Companies with a track record of dividend growth (at least 5 years) and strong fundamentals.
SPDR S&P Dividend ETF (SDY): Tracks the S&P High Yield Dividend Aristocrats Index, targeting companies with 20+ years of consecutive dividend increases.
For investors operating in the Canadian market, the following alternatives offer similar dividend-focused strategies:
Vanguard FTSE Canadian High Dividend Yield Index ETF (VDY): This is the “gold standard” for Canadian dividend seekers. It focuses on high-yield Canadian stocks, heavily weighted toward the Big Five banks and major energy providers. It is an excellent choice for those looking for tax-efficient Canadian dividends in non-registered accounts.
iShares S&P/TSX Composite High Dividend Index ETF (XEI): A direct competitor to VDY, XEI offers broader diversification across more sectors, including a larger weight in telecommunications and utilities. It aims to provide consistent monthly income with a low management fee.
BMO Canadian Dividend ETF (ZDV): Unlike the market-cap-weighted VDY or XEI, ZDV uses a rules-based methodology similar to SCHD. It screens for dividend growth, yield, and payout sustainability, offering a more “curated” approach to the Canadian dividend landscape.
Target Investors
The SCHD ETF is primarily meant for investors seeking income through dividends and those who prefer a conservative investment approach. It's ideal for:
Income-focused investors: Those who want a steady stream of dividend income.
Long-term investors: Investors who are looking for stable, long-term growth with lower volatility.
Dividend Growth Investors: Investors who want their income to increase over time to combat inflation or meet rising expenses.
Risk-averse investors: Those who prefer investing in high-quality, financially robust companies with a history of paying dividends.
Passive Portfolio Managers: Investors who want a "set-and-forget" strategy that automatically rebalances and filters for quality.
Tax-sensitive investors: Due to its tax-efficient structure, it's suitable for taxable accounts.
Reason to Invest…
Ultra-Low Cost Structure: The minimal management fee ensures that compounding works in favor of the investor rather than the fund manager.
Stringent Quality Screens: The inclusion of debt-to-cash-flow and ROE metrics helps filter out “yield traps” or companies in financial distress.
Consistent Dividend Growth: By requiring a 10-year payment history, the fund captures companies with a proven culture of returning capital to shareholders.
Automatic Rebalancing: The annual reconstitution ensures that the fund sells “winners” that have become overvalued and buys “quality” at better price points.
Defensive Characteristics: The focus on profitable, cash-rich companies provides a “cushion” during periods of high market volatility.
Diversification Benefits: While focused on dividends, the 100-stock portfolio provides broad exposure across various sectors of the U.S. economy.
Simplicity for DIY Investors: It eliminates the need to manually research and track individual stocks, providing a professional-grade strategy in a single ticker.
Tax Efficiency in RRSPs: For Canadian investors, holding SCHD in an RRSP avoids the 15% U.S. withholding tax on dividends due to tax treaties.
Reason Not to Invest…
Significant Technology Underweight: Investors looking for exposure to high-growth AI or software names will find very little of it here.
Exclusion of REITs: Real Estate Investment Trusts are excluded from the index, meaning investors must look elsewhere for real estate exposure.
U.S. Concentration Risk: As a pure U.S. equity fund, it does not provide international diversification or exposure to emerging markets.
Currency Fluctuations: For Canadians, the value of the investment will rise and fall with the USD/CAD exchange rate.
Withholding Taxes in TFSAs: Dividends are subject to a 15% non-resident withholding tax if held in a TFSA or non-registered account.
Value Strategy Lag: During aggressive “Growth” bull markets (like the 2021 tech rally), this fund is likely to underperform the broader S&P 500.
No Small-Cap Exposure: The fund focuses almost exclusively on large-cap, established companies, missing out on the growth potential of smaller firms.
Strict Eligibility Rules: Sometimes the strict 10-year rule causes the fund to miss out on high-quality companies that have only recently initiated a dividend.
Annual rotation occurs.
Due to the annual shuffling, sector allocation may change.