The Schwab US Dividend Equity ETF (SCHD) has become a giant $68 billion behemoth, highly popular among dividend-seeking investors, especially retirees. It is a five-star rated fund with a strong record of dividend distributions and growth. This article explores the top 3 reasons you should avoid SCHD ETF and the better alternatives.
SCHD ETF has a low dividend yield
The main reason why investors buy the SCHD ETF is because of its consistent dividend payouts to invest. It has a record of 13 years of consecutive dividend growth, and a compounded annual growth rate (CAGR) of 11%, higher than the sector median of just 6.15%.
The challenge, however, is that the fund has a fairly small yield, especially when you consider the risk-free return offered by US government bonds. A closer look shows that short-term government bonds yield over 4%, while the PIMCO Intermediate Municipal Bond Active Exchange-Traded Fund ETF (MUNI) yields 3.48%. The latter benefits because its income is not taxable.
SCHD’s dividend yield is higher than the Vanguard S&P 500 (VOO) ETF, which has a 1.20% yield. Nonetheless, the spread between the two is not all that big.
Therefore, assuming that you have invested $100,000 in SCHD ETF, and if the yield remains at 3.75%, you can expect to receive $3,750 a year or $312 a month. The final figure will be lower than that because of taxes. A similar amount invested in the ten-year government bonds will bring in $4,100 a year or $341.
This example focuses only on the dividend payout. Of course, the SCHD ETF will likely do better than bonds because of its price appreciation.
Schwab US Dividend ETF lags behind the S&P 500 index and Nasdaq 100
The other reason to avoid the Schwab US Dividend ETF is that it often underperforms the S&P 500 and Nasdaq 100 indices.
While the fund has a higher dividend yield, its total return is usually smaller than the benchmark US indices. We believe that the total return is a better option for an investor because it includes the dividends paid and the price return.
The SCHD ETF has returned 1.72% this year, while the Vanguard S&P 500 and the Invesco QQQ ETF (QQQ) have gained 4.06% and 5.27%, respectively.
The same performance has happened in the last three years when the SCHD’s total return stood at 7.90% compared with the other two’s 38% and 54%. As shown below, it has lagged behind the two in by far in the last five years.
SCHD ETF is not forward-looking
The other reason to avoid the SCHD ETF is that it is not a forward-looking fund, which is understandable since it invests in traditional companies that have a record of paying dividends.
A closer look at the sectors shows that most of its companies are in slow-growing areas like financials, healthcare, consumer staples, industrials, and energy.
The biggest companies in the fund are Coca-Cola, Abbvie, Cisco Systems, Amgen, Pfizer, Chevron, and Verizon. While all these are all good companies, they don’t have a futuristic aspect to them.
The biggest changes shaping the world today are in the technology sector. They include areas like cloud computing, artificial intelligence, and quantum computing. This explains why the SCHD ETF trades at a discount compared to the broader market. It has a price-to-earnings ratio of 17, lower than the S&P 500’s 22.
Therefore, while SCHD is a good dividend ETF to consider, it has some limitations, including its low dividend yield, underperformance, and its lack of a forward-looking view.
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