Is SCHD No Longer the KING of Dividend ETFs?

Summary

In this video, the Schwab US Dividend Equity ETF (SCD) is analyzed to determine if it still reigns as the king of dividend ETFs. SCD’s strong dividend growth, historical returns, and robust investment strategy are highlighted, along with its recent underperformance relative to the tech-driven S&P 500. Despite concerns over a dip in dividend growth, SCD’s methodology and solid financial metrics make it a reliable long-term investment. The video ultimately reaffirms SCD’s value for investors seeking steady dividend income, growth, and market protection.

Takeaways

• 😀 SCD (Schwab US Dividend Equity ETF) is a popular dividend ETF known for its high dividend yield, strong historical growth, and solid share price appreciation.
• 😀 The ETF tracks the Dow Jones US Dividend 100 Index, focusing on stocks with consistent dividend payments and a solid financial foundation.
• 😀 SCD follows a rigorous selection methodology, which includes screening for stocks with a 10-year consecutive dividend payment record, a minimum market cap of $500 million, and adequate liquidity.
• 😀 SCD’s stock selection process ranks stocks by dividend yield, free cash flow, debt ratio, return on equity, and dividend growth, ensuring high-quality dividend payers.
• 😀 The fund has an annual reconstitution, which means it revises its holdings every year based on updated stock data and market conditions.
• 😀 Despite its focus on high dividend yield, SCD aims to limit individual stock exposure to 4% and sector exposure to 25%, ensuring diversified risk.
• 😀 In recent years, the ETF has been underperforming the S&P 500, mainly due to its limited exposure to high-growth tech stocks.
• 😀 SCD is known for its ability to provide downside protection, often outperforming the broader market during periods of significant downturns, like in 2022.
• 😀 Over the past decade, SCD has outperformed the S&P 500 in total return, and the Dow Jones US Dividend 100 Index has consistently outperformed the S&P 500 since its inception in 1999.
• 😀 The ETF offers tax advantages by paying qualified dividends, making it an appealing option for long-term investors seeking to live off dividend income.
• 😀 Despite recent concerns over lower dividend growth (3.77% last year), the dividend growth rate for 2024 has rebounded to over 14%, reaffirming SCD’s strength in long-term dividend growth.

Q & A

What is the Schwab U.S. Dividend Equity ETF (SCD), and why is it popular?

SCD is a dividend-focused exchange-traded fund (ETF) that tracks the Dow Jones U.S. Dividend 100 Index. It's popular because it offers a higher-than-average dividend yield, a strong history of dividend growth, and solid share price appreciation, making it a reliable choice for income-focused investors.

What are the key features of SCD's investment strategy?

SCD’s strategy involves selecting stocks that have paid dividends for at least 10 consecutive years, with a market capitalization of at least $500 million. Stocks are then ranked by yield, and the top 50% are selected based on their dividend yield and other financial metrics like free cash flow, debt ratios, and 5-year dividend growth.

How does SCD select its holdings, and what are the rebalancing criteria?

SCD selects stocks based on a methodology that ranks them by dividend yield and other financial metrics. The fund is rebalanced annually, where stocks that no longer meet the criteria are replaced, and new stocks are added based on updated rankings.

What was the performance of SCD compared to the S&P 500 over the past year?

Over the past year, SCD underperformed the S&P 500 in price return, with the S&P 500 rising by 35% while SCD only gained 20%. However, when considering total return (including dividends), the gap narrows significantly.

Why has SCD underperformed the S&P 500 recently?

SCD has underperformed due to its lower exposure to technology stocks, which have seen significant growth in recent years, especially during the tech boom in 2023. The S&P 500, with a higher allocation to tech stocks, benefited from this surge.

What are some of the key advantages of investing in SCD?

SCD offers several advantages, including a higher-than-average dividend yield, strong dividend growth, and downside protection during market declines. Additionally, it has a low expense ratio, making it cost-effective for long-term investors.

How does SCD protect against market downturns?

SCD provides downside protection by focusing on stable, high-quality dividend-paying companies. During the market downturn in 2022, for example, SCD performed better than the S&P 500, which saw a significant drop.

What is the significance of SCD’s dividend growth rates?

SCD’s dividend growth rates are a key selling point. Despite a lower growth rate in 2023 (3.77%), it has a strong track record of double-digit dividend growth over 3, 5, and 10 years. In 2024, dividend growth has rebounded to 14.3%, showing strength in its ability to grow payouts to investors.

How does SCD compare to the S&P 500 in long-term performance?

SCD has outperformed the S&P 500 over the long term. Since its inception in 2011, SCD has delivered an annualized return of 13.22%, compared to the S&P 500’s 10-year annualized return of around 10%. Additionally, the Dow Jones U.S. Dividend 100 Index, which SCD tracks, has outperformed the S&P 500 since its inception in 1999.

What is the tax advantage of investing in SCD?

SCD pays qualified dividends, which are taxed at a lower rate than ordinary income, providing a tax advantage for long-term investors, particularly those looking to generate income from dividends.

Is SCD still a good investment despite recent concerns?

Yes, despite recent concerns regarding its performance relative to the S&P 500, SCD remains a strong investment choice for dividend-focused investors. Its solid track record of dividend growth, downside protection, and low expense ratio make it an attractive option for long-term income generation.