The Schwab U.S. Dividend Equity ETF (SCHD) is one of the crucial popular dividend ETFs available in the market today with an enormous $63.7 billion in assets under management (AUM).
The fund recently made some waves by executing a 3-for-1 split which went into effect on October tenth. We’ll discuss the rationale and details regarding the share split in this text. But more importantly, we’ll evaluate the merits of holding SCHD in an investment portfolio.
I’m bullish on this well-known dividend ETF based on the strength of its attractive yield, its diversified portfolio of highly-rated dividend stocks, and an ultra-low expense ratio.
What Is the SCHD ETF’s Strategy?
In line with fund sponsor Charles Schwab, SCHD’s strategy is solely to take a position in an index called the Dow Jones U.S. Dividend 100 Index. The index is “focused on the standard and sustainability of dividends.” The fund also “invests in stocks chosen for fundamental strength relative to their peers, based on financial ratios.”
Examining the Split
As one of the crucial popular dividend ETFs available in the market, SCHD recently made some waves when it conducted a 3-for-1 stock split that went effective on October 10, 2024. It’s rather more common for company stocks to separate than ETFs, and here’s a rare case where an exchange-traded fund has split. The split doesn’t have any fundamental impact on SCHD’s investment prospects. What’s occurred is that investors now own three shares of SCHD for each one share previously held, while the market price of the ETF is 1/3 the worth it could be without the split.
A share split has some minor advantages, reminiscent of the cheaper price per share making it easier for smaller investors to ascertain an investment. A stock split also can enhance liquidity. It may trigger increased options activity on the ticker (an options contract consists of 100 shares). But with all that said, the outlook for SCHD stock ought to be no different now than if no split had taken place.
Many popular stocks which have engaged in stock splits over the past yr, like Nvidia (NVDA) and Broadcom (AVGO), had share prices of well over $1,000 a share, making a split more meaningful. Those splits made it significantly more cost-effective for investors to purchase a share, or one lot (100) of shares. SCHD, then again, was trading at just below $85 per share before the split, so the necessity for a split seemed less apparent here. The flexibility to purchase fractional shares on brokerages like Robinhood (HOOD) and others also mitigates the necessity for stock splits to some extent.
Regardless, at the tip of the day, this is similar solid dividend ETF with the identical holdings it had prior to the share split.
Portfolio of Blue-Chip Dividend Stocks
The SCHD ETF offers sound diversification to investors. It owns 100 stocks, and its top 10 holdings account for 41.0% of its assets. Below, you’ll find an outline of SCHD’s top 10 holdings from TipRanks’ holdings tool.
As you possibly can see, the fund owns a plethora of well-known dividend stocks, starting from top holding Home Depot (HD), to BlackRock (BLK), to Lockheed Martin (LMT).
Along with being blue-chip dividend stocks, one other thing that these top holdings have in common is that they provide strong Smart Scores. The Smart Rating is a quantitative stock scoring system created by TipRanks. It gives stocks a rating from one to 10, based on eight key market aspects. The rating is data-driven and doesn’t involve any human interpretation. Impressively, eight stocks from SCHD’s top 10 holdings have Smart Scores of eight or higher.
The Smart Rating system also rates SCHD itself favorably, giving it an Outperform-equivalent ETF Smart Rating of 8.
Advantageous Valuation
Beyond being top dividend stocks, one other nice thing about SCHD’s holdings is that overall, they’re fairly inexpensive. The ETF’s holdings currently have a price-to-earnings ratio of 17.6x. That is one more reason I’m bullish on the ETF.
While a 17.6x P/E ratio isn’t dirt low cost, it’s considerably more cost-effective than the broader market at a time when the S&P 500 has a price-to-earnings ratio of 24.7x.
Because of this SCHD and its holdings probably offer a bit more downside protection than the broader market, and potentially have a bit more room for upside from multiple expansion. The fund also carries a beta of 0.74. Because of this SCHD’s share price is just about three-quarters as volatile because the broader market. This adds credence to SCHD’s defensive qualities (as discussed above within the valuation section) which might be attractive for investors looking for to avoid volatility.
Assessing SCHD’s Performance
SCHD has generated solid returns for its shareholders through the years. As of September thirtieth, the ETF has produced a three-year annualized return of 8.2%, a five-year annualized return of 13.0%, and a 10-year annualized return of 11.7%.
It’s price noting that SCHD has lagged behind broad market funds just like the Vanguard S&P 500 ETF (VOO) over each of those time frames (for reference, VOO has posted an annualized five-year return of 15.9%). That is probably going attributable to the expansion opportunities many non-dividend paying firms have available.
SCHD’s underperformance against the S&P 500 index (SPX), and its tracking ETFs, comes at a time when many large-cap tech stocks with small (or no) dividends have powered the index. If we return to an environment where more value-oriented dividend stocks are favored again, SCHD could outperform the broad market. For instance, SCHD has barely outperformed VOO over the past three months in what has been a volatile time for tech stocks.
No matter comparisons, double-digit returns over a 10-year time horizon, like SCHD has delivered, are nothing to scoff at. Moreover, for investors who own numerous high-flying tech stocks, SCHD could provide worthwhile diversification advantages.
SCHD Offers an Attractive Yield
The SCHD ETF currently yields 3.4%. That is a sexy yield and greater than double the present yield of the S&P 500. That’s pretty attractive.
Moreover, the fund has a track record of dividend consistency. SCHD has paid a dividend for 12 straight years, and increased its payout annually. The dividend payout has been growing at a solid 12% clip over the past five years, so investors can likely expect continued increases in payouts over time. Unless, in fact, hard times hit Corporate America, forcing some firms to chop their dividend.
Low Expense Ratio for SCHD
SCHD charges a bargain-bin expense ratio of just 0.06%. Because of this an investor with $10,000 within the fund can pay just $6 in fees over the course of a yr. It’s hard to argue with this expense ratio; it’s lower than the value of a fast-food lunch today.
The savings from a low-fee investment fund like SCHD can really add up over time. Assuming that the present expense ratio stays the identical, and the fund returns 5% per yr on an annualized basis going forward, an investor putting $10,000 into SCHD would pay just $77 in fees over the course of a decade.
Is SCHD Stock a Buy, In line with Analysts?
Turning to Wall Street, SCHD earns a Moderate Buy consensus rating based on 54 Buys, 37 Holds, and 10 Sell rankings assigned prior to now three months. The average SCHD stock price goal of $30.16 implies about 5% upside potential from current levels.
In Conclusion
I’m bullish on SCHD based on its attractive 3.4% dividend yield, its diversified portfolio of highly-rated blue-chip dividend stocks, the relatively inexpensive valuation of those holdings, and the fund’s investor-friendly expense ratio.
The recent 3-for-1 split was an interesting development but ultimately doesn’t change much for the ETF or its holders.
The one downside of SCHD is that it has lagged the broader market through the years, despite posting respectable double-digit annualized returns. As noted above, a few of SCHD’s underperformance versus the S&P 500 is attributable to the dominant performance of large-cap tech stocks, firms that don’t generally pay attractive dividends.
SCHD stock could possibly be serve a precious purpose in an investor’s portfolio, by delivering strong dividend income and lower volatility. SCHD could also outperform should investors rotate away from growth and back toward value-oriented dividend stocks.