The Schwab U.S. Dividend Equity ETF (SCHD) is one of the most popular dividend ETFs in the market today with a massive $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 10th. We’ll discuss the rationale and details regarding the share split in this article. 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?
According to fund sponsor Charles Schwab, SCHD’s strategy is simply to invest in an index called the Dow Jones U.S. Dividend 100 Index. The index is “focused on the quality and sustainability of dividends.” The fund also “invests in stocks selected for fundamental strength relative to their peers, based on financial ratios.”
Examining the Split
As one of the most popular dividend ETFs 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 much more common for company stocks to split than ETFs, and here is 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 every one share previously held, while the market price of the ETF is 1/3 the value it would be without the split.
A share split has some minor benefits, such as the lower price per share making it easier for smaller investors to establish an investment. A stock split can also enhance liquidity. It may also trigger increased options activity on the ticker (an options contract consists of 100 shares). But with all that said, the outlook for SCHD stock should be no different now than if no split had taken place.
Many popular stocks that have engaged in stock splits over the past year, 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 affordable for investors to buy a share, or one lot (100) of shares. SCHD, on the other hand, was trading at just under $85 per share before the split, so the need for a split seemed less apparent here. The ability to buy fractional shares on brokerages like Robinhood (HOOD) and others also mitigates the need for stock splits to some degree.
Regardless, at the end of the day, this is the same solid dividend ETF with the same 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 overview of SCHD’s top 10 holdings from TipRanks’ holdings tool.
As you can see, the fund owns a plethora of well-known dividend stocks, ranging from top holding Home Depot (HD), to BlackRock (BLK), to Lockheed Martin (LMT).
In addition to being blue-chip dividend stocks, another thing that these top holdings have in common is that they offer strong Smart Scores. The Smart Score is a quantitative stock scoring system created by TipRanks. It gives stocks a score from one to 10, based on eight key market factors. The score is data-driven and does not involve any human interpretation. Impressively, eight stocks from SCHD’s top 10 holdings have Smart Scores of eight or better.
The Smart Score system also rates SCHD itself favorably, giving it an Outperform-equivalent ETF Smart Score of 8.
Advantageous Valuation
Beyond being top dividend stocks, another nice thing about SCHD’s holdings is that overall, they are fairly inexpensive. The ETF’s holdings currently have a price-to-earnings ratio of 17.6x. This is another reason I’m bullish on the ETF.
While a 17.6x P/E ratio isn’t dirt cheap, it’s considerably more affordable than the broader market at a time when the S&P 500 has a price-to-earnings ratio of 24.7x.
This means that 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. This means that SCHD’s share price is only about three-quarters as volatile as the broader market. This adds credence to SCHD’s defensive qualities (as discussed above in the valuation section) which can be attractive for investors seeking to avoid volatility.
Assessing SCHD’s Performance
SCHD has generated solid returns for its shareholders over the years. As of September 30th, 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 worth noting that SCHD has lagged behind broad market funds like the Vanguard S&P 500 ETF (VOO) over each of these time frames (for reference, VOO has posted an annualized five-year return of 15.9%). That is likely attributable to the growth opportunities many non-dividend paying companies 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 example, SCHD has slightly outperformed VOO over the past three months in what has been a volatile time for tech stocks.
Regardless of comparisons, double-digit returns over a 10-year time horizon, like SCHD has delivered, are nothing to scoff at. Furthermore, for investors who own a large number of high-flying tech stocks, SCHD could provide worthwhile diversification benefits.
SCHD Offers an Attractive Yield
The SCHD ETF currently yields 3.4%. This is an attractive yield and more than double the current yield of the S&P 500. That’s pretty attractive.
Furthermore, 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, of course, hard times hit Corporate America, forcing some companies to cut their dividend.
Low Expense Ratio for SCHD
SCHD charges a bargain-bin expense ratio of just 0.06%. This means that an investor with $10,000 in the fund will pay just $6 in fees over the course of a year. It’s hard to argue with this expense ratio; it’s less than the price of a fast-food lunch these days.
The savings from a low-fee investment fund like SCHD can really add up over time. Assuming that the current expense ratio remains the same, and the fund returns 5% per year 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, According to Analysts?
Turning to Wall Street, SCHD earns a Moderate Buy consensus rating based on 54 Buys, 37 Holds, and 10 Sell ratings assigned in the past three months. The average SCHD stock price target 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 these 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 over the years, despite posting respectable double-digit annualized returns. As noted above, some of SCHD’s underperformance versus the S&P 500 is due to the dominant performance of large-cap tech stocks, companies that don’t generally pay attractive dividends.
SCHD stock could be serve a valuable 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.
Disclosure