As with any investment vehicle, once the product becomes overly loved the returns slow down. The Schwab U.S. Dividend Equity ETF™ (NYSEARCA:SCHD) is a prime example of an over-loved investment idea that has now dramatically underperformed the S&P 500 Index (SP500) for an extended period. My investment thesis is more Neutral on the SCHD ETF following a very weak 2023.
Great Dividend Concept
SCHD is designed to closely mirror the performance of the Dow Jones U.S. Dividend 100 Index. The theory is to buy an investment fund that focuses on dividend-growing stocks for long-term cash flow compounding.
The fund list highlights including a low-cost fund with potential tax-efficiency along with investing in stocks based on fundamental strength relative to peers, based on financial ratios. SCHD invests in stocks with a market capitalization of $142 billion with a PE ratio of 15x.
The problem is that the investment concept became overly loved in the last decade and investors started overpaying for the core dividend stocks in the ETF. SCHD has dramatically underperformed the S&P 500 in the last year and actually trails the benchmark over the 5-year period by a dramatic amount, 93.5% versus only 65.2% for SCHD. The fund has only produced a 4.7% return YTD when the S&P 500 has surged this year up 26.4%.
Investors only have to go on Twitter/X to see dividend influencers pushing people to just blindly buy shares of SCHD. Here, a Twitter account called Cade Invests got 211 likes and 45K impressions for perhaps unintentionally implying it was wise to blindly buy SCHD, along with other ETFs.
The dividend ETF now offers a nearly 3.5% dividend yield after the yield slumped below 3.0% at the end of 2021. The ETF offers consistently strong dividend growth, with double-digit growth over the prior 4 years.
The basic concept of the SCHD ETF is very solid. The issue remains the price investors are willing to pay for the stocks in the ETF due to a pure focus on buying dividend-growing stocks with little regard to price paid.
Investors need to learn the difference between a company and a stock. All of these companies are some of the best in the world with strong cash flows, but the stocks don’t always offer the best investments due to the price.
Top 10 Holdings Problem
One only has to look at the top 10 stocks in the SCHD portfolio to see the problems. The top 10 stocks are as follows with corresponding forward P/E ratios:
- Broadcom (AVGO) – 4.48%, 24.1x FY24
- Home Depot (HD) – 4.21%, 22.3x FY24
- AbbVie (ABBV) – 4.20%, 13.8x CY24
- Texas Instruments (TXN) – 4.12%, 25.7x CY24
- Amgen (AMGN) – 4.00%, 14.0x CY24
- Merck & Co. (MRK) – 4.00%, 12.7x CY24
- Chevron Corporation (CVX) – 3.94%, 10.7x CY24
- Cisco Systems (CSCO) – 3.92%, 13.0x FY24
- PepsiCo (PEP) – 3.77%, 20.7x CY24
- Coca-Cola (KO) – 3.76%, 20.9x CY24.
In general, the model has costly consumer stocks with limited growth compared to valuations and biopharma stocks with no growth, but companies that still hike the dividend. Most investors wouldn’t be surprised that this selection of stocks would underperform the market.
Most notably, SCHD has underperforming tech stocks, such as Texas Instruments and Cisco Systems. In the tech sector, higher dividend yields are usually a sign of weak growth and solid cash flows.
Another quick noticeable issue is the inclusion of both PepsiCo and Coca-Cola. The ETF has a combined position of 7.5% in these soda companies that tend to trade at inflated valuations, leading to subdued performance.
As a prime example, Coca-Cola trades at a premium valuation with limited growth. The company is forecast to grow annually in the 6% range, yet the stock trades at nearly 21x 2024 EPS targets.
These stocks are constantly listed as market favorites, in part due to Warren Buffett and Berkshire Hathaway (BRK.B) owning Coca-Cola, yet both stocks have underperformed the market in the last decade. Coca-Cola might have a solid 3.1% dividend yield with strong dividend growth, but investors have long overpaid for this yield, leading to weak total returns despite the odd popularity.
In essence, an investor is getting a group of overly loved dividend stocks from the prior decade. The major benefit of an ETF with a diversified portfolio of over 100 stocks is the ability to spread out risk amongst a group of stocks, but SCHD only manages to reduce returns via concentrating on stocks too loved for a history of consistent dividend growth that now actually lack the growth necessary to reward investors.
The key investor takeaway is that investors should always be careful chasing the latest investing fad. Schwab U.S. Dividend Equity ETF™ is a prime example of where the more investors jumped on the concept, the worse investment returns got in the last decade, culminating in the weak performance in 2023.
SCHD is still too loved for investors to aggressively buy the ETF here, though the weak returns and the climbing dividend yield should improve the returns compared to the benchmark in 2024.
Unleashing the Power of SCHD: A Must-Have Investment for 2023 (NYSEARCA:SCHD)
Investing in the stock market can be a daunting task, with numerous options and volatile market trends. However, there are certain investments that have proven to be dependable and stable in the long run. One such investment is the Schwab US Dividend Equity ETF (SCHD), traded on the New York Stock Exchange under the ticker symbol NYSEARCA:SCHD. This article will delve into the details of SCHD, why it should be a part of your investment portfolio, and its potential for 2023.
What is SCHD?
SCHD is a dividend equity ETF (exchange-traded fund) that invests in high-quality and dividend-paying US stocks. It is managed by Charles Schwab Investment Management, Inc. and has been in existence since October 2011. It has over $20 billion in assets under management and an expense ratio of only 0.06%. This makes it highly affordable compared to other ETFs, where the average expense ratio is around 0.5%.
The Fund’s portfolio is based on the Dow Jones U.S. Dividend 100 Index, which consists of companies that have a track record of consistently paying dividends and exhibit financial stability. The fund’s top holdings include well-known companies such as Microsoft, Johnson & Johnson, and Procter & Gamble.
Why should you invest in SCHD?
1. Dependable Dividend Income
One of the main reasons investors should consider SCHD for their portfolio is the dependable dividend income it provides. SCHD follows a strict screening process, selecting only companies that have a history of consistent dividend payments and financial stability. This ensures a steady flow of dividend income for investors, even during market downturns. As of December 2021, the fund has a 12-month trailing yield of 2.81%, making it an attractive option for income-seeking investors.
2. Low Risk and High-Quality Holdings
SCHD’s portfolio is well-diversified and has a low-risk profile, making it a suitable option for long-term investments. The fund’s top holdings are well-established and financially sound companies, providing stability and potential for long-term growth. This helps mitigate risk and ensures a steady return for investors. The fund also has low turnover, meaning it does not make frequent changes to its portfolio, further reducing risk and expenses for investors.
3. Strong Performance Record
SCHD has a strong track record of performance, outperforming its benchmark index, the Dow Jones U.S. Dividend 100 Index, since its inception. As of December 2021, the fund has a 10-year annualized return of 12.22%, compared to the index’s 11.28%. The fund has also consistently outperformed the S&P 500 Index in terms of total return over the years. This makes it a suitable option for investors seeking long-term growth and stability.
4. Affordable and Tax-Efficient
As mentioned earlier, SCHD has a low expense ratio of only 0.06%, making it one of the most affordable ETF options in the market. This means a higher portion of the investment goes towards the actual stocks, resulting in better returns for investors. The fund is also tax-efficient, meaning it has a low turnover rate, resulting in fewer capital gains distributions. This is beneficial for investors, as they can avoid paying taxes on their gains until they sell their shares.
5. Potential for 2023
Experts predict that 2023 could be a promising year for SCHD, as the market recovers from the effects of the COVID-19 pandemic. With the current trend of rising interest rates, dividend-paying stocks are expected to perform well in the coming years, making SCHD a highly attractive option for investors. Additionally, the fund’s top holdings such as Microsoft and Johnson & Johnson have healthy financials and are well-positioned to weather any market downturns, providing stability and potential for growth in the long run.
Tips for Investing in SCHD
– Consider SCHD as a long-term investment option, as it performs best over time.
- Regularly review the fund’s holdings and performance to ensure it aligns with your investment goals.
- Reinvest dividends to maximize returns.
– Consider diversifying with other ETFs and individual stocks to balance your portfolio.
In conclusion, SCHD is an excellent option for investors seeking stability, long-term growth, and dependable dividend income. With its low expense ratio, efficient management, and strong performance record, it is a must-have investment for 2023. As always, it is crucial to do thorough research and consult a financial advisor before making any investment decisions. By unleashing the power of SCHD, you can secure a reliable and potentially lucrative investment for your future.