Schwab U.S. Dividend ETF (SCHD): Better Than Bonds, High-Yield ETFs
Stock Analysis & Ideas

Schwab U.S. Dividend ETF (SCHD): Better Than Bonds, High-Yield ETFs

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There are plenty of investment options out there that offer higher yields than SCHD’s 3.5% dividend yield, but it’s hard to beat this blue-chip ETF’s combination of yield and total-return potential over the long term.

I recently added the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) to my portfolio. Some people may ask, “What’s so great about a dividend ETF that yields 3.5% when 10-year Treasury notes are yielding 4.12%, and there are plenty of other higher-yielding options out there?” Therefore, I want to walk investors through why SCHD is still a top dividend ETF to own, even amid fierce competition from alternatives with higher yields. 

What is the SCHD ETF’s Strategy?

Launched in 2011, SCHD seeks to track the returns of the Dow Jones U.S. Dividend 100™ Index, which is “focused on the quality and sustainability of dividends.” The ETF has grown popular and now has $48.75 billion in assets under management (AUM).

A Clear Winner

While SCHD’s dividend yield of 3.5% is appealing to me, I understand why some investors may question investing in it when 10-year Treasury yields offer investors a risk-free yield of 4.12%.  

The answer here comes in two parts. First, while the 10-year Treasury does offer a higher yield and a risk-free return, the payout from the 10-year Treasury isn’t going to grow like that of SCHD. In fact, SCHD has increased its total annual payout for 11 years in a row. Not only that, but the payout has grown at an impressive 11.3% compound annual growth rate (CAGR) over this time frame.  

Secondly, while locking in a risk-free return from Treasury Bonds has its appeal, giving investors guaranteed fixed income, it doesn’t offer much in the way of capital appreciation that will help your portfolio grow over time.

Conversely, SCHD offers dividends plus capital appreciation. This blue-chip ETF has given its investors double-digit total returns for a long time. Over the past three years, SCHD has generated an admirable annualized total return of 15.4%. Additionally, over the past five years, SCHD has posted an annualized return of 11.7%, which is matched by its 10-year annualized return of 11.7%. 

The returns from long-term Treasury Bonds, as represented by the iShares 10-20 Year Treasury Bond ETF (NYSEARCA:TLH) can’t keep up with this type of high-octane performance. TLH has lost money on a three-year basis, with a three-year total annualized return of -12.1%. Over the past five years, its total annualized return is better but still negative at -1.3%, and over the past 10 years, it has eked out a 0.8% annualized total return. 

Meanwhile, corporate bonds are offering even higher yields. For example, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEARCA:HYG) is yielding 5.7%. However, like TLH, HYG’s long-term returns pale in comparison to those of SCHD. HYG’s three-year annualized return is just 0.9%, while its five- and 10-year annualized returns of 2.4% and 3.2% aren’t much to write home about either. 

Even when compared to a high-yield equity ETF like the Global X SuperDividend ETF (NYSEARCA:SDIV), which yields an eye-popping 12.8%, SCHD is the superior option. Despite this massive yield, SDIV’s long-term returns are underwhelming, as it has lost 1.4% on an annualized basis over the past three years and lost 9.6% on an annualized basis over the past five years. Over the past 10 years, SDIV has lost 2.3% on an annualized basis. 

Below, you can check out a comparison between these four ETFs using TipRank’s ETF Comparison Tool, which allows investors to compare up to 20 ETFs simultaneously across a wide variety of criteria.

As you can see, while there are plenty of types of ETFs out there offering higher yields, there’s really no comparison here, as SCHD is the hands-down winner. A lot of this can be explained by the fact that SCHD invests in high-quality companies that have been growing their earnings over time rather than just fixed-income or high-yield investments, as we’ll see below. 

SCHD’s Holdings 

SCHD gives investors solid diversification, with 101 holdings. Its top 10 holdings make up 40.9% of the fund. Below, you can check out a chart of SCHD’s top 10 holdings using TipRanks’ holdings tool.

A top holding like Broadcom (NASDAQ:AVGO) is a good example of SCHD’s approach. While Broadcom may not be what some investors think of as a quintessential dividend stock, being that it yields just 2.1%, its share price has risen dramatically over the last few years, and its earnings have grown, combining to give its shareholders excellent returns. Additionally, Broadcom has increased its dividend payout for 13 years in a row, and its annual dividend payout has grown at a 37% compound annual growth rate (CAGR) over the past decade.     

Similarly, another top holding, Home Depot (NYSE:HD), has been one of the stock market’s long-time winners over the years. While shares yield just 2.5%, the home-improvement company has increased its payout for 14 years in a row, and the stock price has more than quadrupled over the past decade. 

Another positive about SCHD’s portfolio is that it is attractively valued relative to the broader market. SCHD’s holdings feature an average price-to-earnings ratio of 13.9 times earnings, which is a steep discount to the S&P 500’s (SPX) valuation of just under 20 times earnings.

By investing in companies that are growing and paying dividends, SCHD has generated solid double-digit returns over time. 

Is SCHD Stock a Buy, According to Analysts? 

Turning to Wall Street, SCHD earns a Moderate Buy consensus rating based on 46 Buys, 47 Holds, and nine Sell ratings assigned in the past three months. The average SCHD stock price target of $81.73 implies 9.7% upside potential.

Low Fees

Another nice thing about SCHD is its relative affordability. Its expense ratio is just 0.06%. An investor putting $10,000 into SCHD today would pay just $6 in fees over the course of the year. If the expense ratio stays at 0.06% and the fund returns 5% per year, this same investor would pay just $77 in fees over the next decade, which is more than reasonable. 

Investor Takeaway

While investors now have many options at their disposal when looking for yield, it’s hard to beat the combination of yield and capital appreciation that an ETF like SCHD has generated over time, making it a superior option to many instruments with higher yields. 

Past performance is no guarantee of future results, and there is certainly a place in investor portfolios for asset classes like bonds. That being said, SCHD’s investment approach and portfolio seem well-equipped to continue to deliver a compelling combination of dividends and price appreciation over time. I recently made SCHD a core holding of my portfolio for these reasons, and I look forward to being a long-term owner of this top ETF.



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