SCHD: There’s little reason to own this ETF

Those of you who read my articles regularly may know that I am not a fan of certain investment products. For example, late last year in September I wrote a bearish article about them. article regarding Schwab US Dividend ETF (NYSEARCA:SCHD). For many investors, this ETF is an attractive way to generate yield. And it’s clear that it’s a favorite ETF for many investors, because while I received many positive comments about this article, I also received many comments from readers who disagreed with my decision to rate this ETF a “sell.”

When I rate an investment opportunity a “sell,” it is not a statement that I expect the stock price to fall — that is reserved for a “strong sell” rating — but rather my belief that the stock, or in this case the ETF, will quite significantly underperform the overall market in the near future. Amount. My assessment at the time was based on the composition and historical performance of the ETF. Although some of the alternative investments I suggested were criticized, it is worth noting that from the time of publication of that article until today, those investments have overwhelmingly outperformed the ETFs.

To meet the expectations of my readers, I like to keep myself informed of the track record of the investments I write about. Given that a significant amount of time has passed since this article was written, I believe it is appropriate to revisit the situation with an open mind. I approached my analysis of SCHD with the hope that my thinking would change. However, my findings have rather reaffirmed my bearish view of SCHD. Ultimately, I am concerned that this will be a permanent “sell” outlook. However, there is one caveat that market participants may be open to.

Fresh look

if you Prospectus We can see that the objective of the ETF announced by the team overseeing SCHD is to track the Dow Jones US Dividend 100 Index as closely as possible. The goal here is to invest in large companies with stable dividends. In fact, the prospectus even states that to be included in the aforementioned index, “all index stocks must have paid dividends for at least 10 consecutive years.” They must also have a float-adjusted market capitalization of at least $500 million. There are other criteria related to liquidity. After all, this is about prioritizing safe dividends above all else.

This is fine, but I think such an emphasis will miss out on a lot of money. For example, for retirees, there are ways to earn higher yields than the 3.45% that SCHD currently offers. Diversifying into REITs, MLPs, and BDCs, for example, can achieve 5%, 6% or even higher yields. In addition to this, an excessive emphasis on dividends can lead to a neglect of total returns. And this is probably my biggest concern for investors buying SCHD.

Before I explain why SCHD is such a poor investment opportunity, I want to mention an interesting observation I made about this ETF. The above table shows the composition of the ETF as of the end of March of this year, the latest period for which data is available. The table also shows the composition as of the last time I wrote about it. There are some notable differences. In particular, financial companies have significantly increased their representation in the ETF. The same is true for energy stocks. Over the same period, industrial stocks have declined in importance, and the same can be said for information technology companies. This arguably has more to do with the performance of different aspects of the market than anything else. But it is interesting that this is a barometer of market performance in a broader sense.

On the performance side, it’s important to note that from when I wrote about SCHD last year until today, the ETF is only up 8%. This is a total return including dividends. In my previous article on the company, I mentioned that if investors wanted to hold an ETF, one that tracks the broader market might make much more sense. Although it offers a much lower yield of just 1.27%. SPDR S&P 500 ETF Trust (spy) was a much better option, up about 20.4% over the same period, and that includes the aforementioned yield. Even more impressive is Invesco QQQ Trust ETF (Hehehehe). It’s an ETF that tracks the performance of the NASDAQ-100 index. Including the 0.53% yield currently offered, it has a potential upside of 24.6%. As a value investor, I’m always wary of the NASDAQ, as the market can be quite speculative when it comes to growth opportunities. However, there’s no denying that its performance during this period has been impressive.

In our previous article on SCHD, we also suggested five other stocks worth considering instead of the company claiming attractive yields. These five stocks performed very well overall. Four of the five saw their share prices increase, with increases ranging from 12.3% to 36.2%. The only one that fell was Walgreens Boots Alliance (WBA) plummeted 28%.

As the chart above shows, the dividend yields of these companies have fallen over this period, mostly due to stock price increases outpacing dividend increases. In Walgreens’ case, the decline in dividend yields was due to management’s decision Earlier this year, they announced a whopping 48% cut in their dividend, which resulted in a loss, but an evenly weighted portfolio of these five companies would have generated a combined return of 13.8% and, without Walgreens, would have generated a return of 24.3%.

Over the long term, SCHD has consistently underperformed the market by a fair amount. But that doesn’t mean it never makes sense for investors to buy SCHD. Either way, if you think the market will flatten or rise, I would argue that it makes much more sense to invest in a diversified portfolio of dividend stocks or buy one of the ETFs mentioned above. In the latter case, you may not get the yield that SCHD offers. But in this environment, a 3.45% yield is far from impressive. The reason I say SCHD could make sense in certain cases is because the company has proven to be a bastion of safety.

You can cherry-pick any data point you like. But if we look during the COVID-19 pandemic period from the end of 2019 to the end of 2022, we can see that SCHD has actually outperformed both SPY and QQQ. I think there are two reasons for this. First, the companies included in the ETF have the advantage of being large, stable companies. Such companies tend to be less volatile during difficult times. And the second reason is that the modest yield paid by the ETF is pocket money that won’t be lost in a market downturn. But if your investment horizon is more than a few years, SCHD is almost certain to lose out compared to most other opportunities. Because even if you extend that timeline to the end of 2023, both of the alternative ETFs I pointed out outperformed SCHD.

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I fully expect this article to generate a lot of angry comments, but at the end of the day, my only defense is that the data speaks for itself. Given the information available, SCHD looks like a poor place to allocate capital. Total return-focused investors have plenty of other options. Certainly, if you expect a market sell-off, this may be one of the better places to put your money if you’re adamant about keeping it in stocks. But in any other scenario I can think of, there’s no doubt the ETF would significantly underperform other opportunities.