Is SCHD a Good ETF to Buy?

With around $65.7 billion in net assets, Schwab’s US Dividend Equity ETF (SCHD) is one of the most popular funds among investors seeking dividend income from their portfolios.

In the last year, SCHD has even beaten out the S&P 500 by delivering a 27.1% market price return compared to 25.0% from the S&P.

The question now is whether SCHD is still a good buy or if the fund will lag this year?

What Stocks Are in SCHD?

SCHD is made up of 103 holdings that are selected for fundamental strength and the stability of their dividends. Top holdings in the fund include Pfizer, AbbVie, Verizon, Coca-Cola and Texas Instruments.

While none of these mature, dominant businesses are growing as quickly as tech giants like NVIDIA, their strong moats and financial durability allow them to continue delivering dividends to shareholders year after year.

What’s The Upside & Downside of Owning SCHD?

The most obvious benefit of SCHD when compared to a broad index like the S&P 500 is its superior ability to deliver dividend income. SCHD’s 30-day SEC yield was 3.77%, about triple the S&P 500 average of 1.26%. The bottom line is if income is a top priority, SCHD has a lot of merit.

It’s also worth noting that dividends account for a significant amount of the stock market’s long-term returns, often making high-yielding stocks like those found in SCHD strong candidates to buy and hold.

Between 1945 and 2022, for example, roughly one-third of the S&P 500’s total returns could be attributed to reinvested dividends. Investors with long horizons, therefore, are likely to see significant future gains from holding a fund like SCHD and consistently reinvesting the dividends.

Another plus for SCHD is its rather low expense ratio, which is just 0.06%. While there are funds with lower expense ratios out there, SCHD is far from expensive when compared to more actively-managed funds.

Finally, SCHD offers a decent degree of diversification compared to the broader stock market. Looking at the S&P 500 right now, the Magnificent Seven tech stocks now account for about one-third of the total index.

While SCHD is still concentrated among a handful of large holdings, the companies that occupy the top spots in the index aren’t all operating in the same sector. As such, SCHD could be a bit better protected from too much exposure to just a single part of the economy.

The downside of an ETF like SCHD is that it may not capture the outsized gains of high-growth companies that offer little to nothing in terms of dividends. Mega-cap tech stocks have driven much of the market’s growth in recent years.

In 2024, for instance, the Magnificent Seven alone accounted for more than 50% of the S&P 500’s total gain. Over time, there’s a chance that lack of exposure to such extremely high-growth companies could create significant opportunity costs for investors.

Even this negative, however, may have some silver linings. Because SCHD isn’t directly exposed to the massive tech companies that have driven the growth of the market at large over the past two years, it also isn’t exposed to the risks associated with their extremely high valuations.

While a true bubble in AI-driven tech stocks is starting to look a bit less likely, the fact that a few large companies with very optimistic valuations now make up a very large part of the US stock market is still concerning. If anything gets in the way of rapid earnings growth, the large tech stocks could correct downward to somewhat more normal valuations. If this happens, a fund like SCHD is likely to be less risky to own than a total market or S&P 500 fund.

Is SCHD On Sale Now?

Closely related to the last point above is the fact that SCHD’s overall valuation looks fairly attractive. The fund’s overall price-to-earnings ratio is 19.3%, while its price-to-cash-flow ratio is 10.7%. These metrics are quite appetizing in a market that is increasingly showing signs of overvaluation.

The 27.5% return on equity should not be ignored and stands head and shoulders above many other ETFs in the space.

It’s also worth noting that several of the major holdings in SCHD could still have significant room to run on their own.

To illustrate this, let’s consider the fund’s top three holdings, which are Pfizer, AbbVie and Cisco Systems. Looking at analyst price forecasts, these three stocks are projected to have average upsides of 18.5%, 12.5% and 6.8% over the next 12 months, respectively.

While Cisco’s is a bit low, the other two carry projected upside potential above the roughly 10% Goldman Sachs projects for the S&P 500 over the same period.

So, Is SCHD a Buy?

Between a more attractive valuation, better diversification and a higher dividend yield than the broader stock market, SCHD is a compelling Buy.

The fund may also be appealing to somewhat conservative investors, as the stable, blue-chip companies that make it up may be less prone to volatility and more durable during future economic downturns than their high-growth peers.

The best argument against SCHD is the fact that it doesn’t give investors exposure to large tech companies like NVIDIA and Microsoft that have helped the stock market deliver two consecutive years of exceptional returns.

This argument, however, doesn’t hold up particularly well when we consider SCHD’s performance. Last year, the fund delivered slightly higher total returns than the S&P 500 despite lacking exposure to the Magnificent Seven.

All told, SCHD looks like a potential candidate to buy and hold for the long term. This fund offers a decent balance of value, diversification and dividend yield that could make it worth including in several types of portfolios.

Even with the potential opportunity cost of not having exposure to the tech majors considered, SCHD could be a good way for investors to diversify their portfolios with longstanding blue-chip companies that have a history of increasing their dividends in a wide range of market conditions.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.