SCHD - ETF Overview
A Comprehensive Guide to the Schwab U.S. Dividend Equity ETF (SCHD)
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 100â„¢ 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
Sector Allocation2
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.
Performance
As of March 24, 2025, its annualized return since inception is approximately 11-12%. While SCHD has historically underperformed the S&P 500 during strong growth periods due to its value and income focus, it has provided competitive risk-adjusted returns, particularly in flat or declining markets.
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.
This is a comparison of the SCHD ETF and similar alternatives, focusing on their Management Expense Ratios (MER), yields, and annualized performances.
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.
Tax-sensitive investors: Due to its tax-efficient structure, it's suitable for taxable accounts.
Reason to Invest…
Low Expense Ratio: With an expense ratio of 0.06%, SCHD is cost-effective, allowing investors to keep more of their returns.
Stable Dividend Income: SCHD focuses on companies with a history of consistently paying dividends, providing a reliable income stream.
Large, Mature Companies: SCHD is replete with firms that boast robust cash flows and solid balance sheets. The fund is designed to be defensive, performing well during market downturns and maintaining lower volatility.
Diversification: Investing in a diversified portfolio of 100 high-dividend U.S. stocks across multiple sectors can mitigate risk. This strategy provides an alternative to the tech-heavy and potentially overvalued makeup of the S&P 500.
Reason Not to Invest…
Limited Growth Exposure: SCHD focuses on high-dividend stocks, potentially missing out on high-growth companies that reinvest profits.
Sector Concentration: Significant allocations to volatile sectors like Industrials, Energy, and Healthcare can increase risk. Not to mention 100% concentration in the U.S. market.
Exclusion of Smaller Companies: The ETF excludes smaller, speculative firms due to its focus on companies with a long track record of distributions.
Yearly Rotation: Due to SCHD's annual reconstitution, it might remove well-performing or favored companies and substitute them with less desirable ones.
Dividend Cuts in Downturns: While SCHD targets companies with strong dividend histories, economic recessions could lead some holdings to cut or suspend dividends, impacting yield and total return.
Consider joining DiviStock Chronicles’ Referral Program for more neat rewards!Please refer to the details of the referral program.Annual rotation occurs.
Due to the annual shuffling, sector allocation may change.