SCHD: Don't Fret About Recent Underperformance

seekingalpha04-30

Daniel GrizeljIn case you've been living under a rock, it's been a bad time to be an investor in the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD). After putting in a relatively underwhelming ...

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After putting in a relatively underwhelming ...</p>\n\n<a href=\"https://seekingalpha.com/article/4687360-schd-etf-dont-fret-about-recent-underperformance\">Source Link</a>\n\n</div>\n\n\n</article>\n</div>\n</body>\n</html>\n","isBrief":false,"type":0,"news_type":1,"symbol":"SG9999014542.SGD","symbol_name":"United Income Focus Trust Acc SGD","start_time":0,"source_url":"https://seekingalpha.com/article/4687360-schd-etf-dont-fret-about-recent-underperformance","article_id":"2431384476","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1126636461/image_1126636461.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2431384476","pubTimestamp":1714445905,"sourceInfo":{"source_id":"seekingalpha_fund","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Daniel GrizeljIn case you've been living under a rock, it's been a bad time to be an investor in the Schwab U.S. Dividend Equity ETF . After putting in a relatively underwhelming performance over the last two years, many investors are wondering if the ETF is 'broken', as the fund has underperformed the broader market by nearly 30%: TradingViewHowever, while the performance of the ETF hasn't been able to keep up with the explosion in interest in AI & technology related stocks, we think that investors in the fund needn't fret - if they're in it for the right reasons. Today, we're going to take a look at the fund, examine its prospects, and determine what category of investor the fund is best for. Plus, we'll explain that ultimately, if the fund is aligned with your true goals, SCHD should serve as an entirely serviceable investment for the foreseeable future. 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After putting in a relatively underwhelming performance over the last two years, many investors are wondering if the ETF is 'broken', as the fund has underperformed the broader market by nearly 30%: TradingViewHowever, while the performance of the ETF hasn't been able to keep up with the explosion in interest in AI & technology related stocks, we think that investors in the fund needn't fret - if they're in it for the right reasons. Today, we're going to take a look at the fund, examine its prospects, and determine what category of investor the fund is best for. Plus, we'll explain that ultimately, if the fund is aligned with your true goals, SCHD should serve as an entirely serviceable investment for the foreseeable future. Sound good? Let's dive in. What is SCHD? It's likely that you're already familiar with this ETF, but on the off chance that you're not, SCHD, also known as the Schwab U.S. Dividend Equity ETF, is an exchange traded fund that tracks the performance of the Dow Jones U.S. Dividend 100 Index. This means that the fund invests substantially all of its capital into 100 of the U.S. market's top dividend paying companies. The fund first screens for 10 years of dividend consistency, along with some minimum liquidity requirements: SPGIThen, the top 50% of stocks from this universe (as ranked by Forward Yield) are given a score based on how they do in the following categories: FCF / Debt, ROE, Forward Yield, and the 5-Year Dividend Growth Rate. From there, the top 100 stocks with the best scores are selected for the ETF, subject to a few diversification requirements. As far as a stock selection process goes, it's a good one, and it has stood the test of time over the last decade-plus, generating strong yields, strong yield growth, and solid overall performance. Who is SCHD for? This where the tricky bit comes in. Many will have likely seen SCHD's strong performance and thought 'wow, it's outperformed the S&P 500, I better have some of that in my portfolio'. This was an especially prevalent mindset over the latter half of the 2010's and early 2020's, as the fund's total returns were, at most points, above or closely correlated with the S&P 500: TradingViewThis outperformance has widely been driven by quality as a factor, market wide. SCHD also critically outperformed the S&P 500 considerably over the market rout in 2022, which further built its reputation as an optimal investment vehicle. This outperformance has led those seeking total returns to pile into the fund - many of the same people who are now wondering if dividend investing is broken, or inherently flawed. Here's the thing. In our mind, as an investor, you can optimize for one of two things - Income OR Total Returns. In our view, you simply cannot have both. This is perhaps a controversial take, as many have made the case that dividends make up a large portion of S&P 500 returns over the years, or that dividend investing strategies take less risk and produce more returns than investing in the S&P 500 outright. And, to some degree, this is true. SPGI looked at Dividend Aristocrat performance against the S&P 500 over the last 20+ years, and concluded that there was an advantage to investing in the former, as dividend aristocrat companies had better total returns and less volatility than the market as a whole while outperforming significantly in down months for the S&P: SPGIHowever, for most investors most of the time, investing into dividend paying companies as a factor in and of itself, and investing for total returns, should be viewed as mutually exclusive. Why? Because top total return funds, like MOAT or QQQ, which we have covered extensively here and here, are much better positioned for long term outperformance due to their stock selection process, which involves finding innovative & highly competitive companies that can compound capital at very high internal rates of return: TradingView This translates to much stronger long-term appreciation. For the most part, there's nothing special about dividends themselves. Many investors attribute better financial discipline onto companies that pay dividends consistently, but dividend cuts are just as widespread as raises, and all a dividend tells us as investors is that management has no further opportunities internally to invest capital and earn solid rates of return. Sure, some companies that don't pay dividends are struggling financially, but just as many are reinvesting the capital internally to earn better IRR for you, the shareholder. Is SCHD broken? This brings us to the SCHD underperformance question. Has the fund done poorly? If you're an investor looking for total returns, watching the rest of the market roar higher, then yes, yes SCHD has done poorly. However, SCHD was never designed to be a total returns vehicle - it was built to find you quality dividends. If you're in SCHD for total returns, then in our view, you're not in the right vehicle. In fact, if you're an investor in SCHD, you're hopefully only interested in a few charts that we're about to look at - Yield, Dividend History, and Yield on Cost. In these categories, SCHD is holding up its end of the bargain. On a yield basis, SCHD currently pays a 3.45% dividend, a payout constructed from all of the 'quality' underlying companies that make up the fund: Seeking AlphaThis payout has remained largely intact around 3% over 10+ years, which indicates to us that the fund does a good job at selecting quality dividends. Presently, the fund's top holdings include Chevron (CVX), Texas Instruments (TXN), Lockheed Margin (LMT), PepsiCo (PEP) and Coca-Cola (KO), all dividend paying companies with well-covered yields: Seeking AlphaMore broadly, the fund invests into Financials (XLF), Healthcare (XLV), Consumer Staples (XLP) companies, along with other more defensive sectors with sustainable franchises to generate a large share of this yield: Seeking AlphaDividend growth and payout growth has also been strong, as SCHD's payouts have risen over time since inception: Seeking AlphaThis shows that the index screening process has been effective in finding good dividend opportunities. Finally, if you combine the consistent yield with the growing payouts, you get a stable and increasing Yield on Cost graph, which is the true test of any income investment. As you can see, over time, an investment in SCHD has earned more and more yield: Seeking AlphaThis is exactly what quality income vehicles aim to do, and SCHD has done it successfully. Thus, if you're an SCHD investor, don't fret about the underperformance, be happy that the fund continues to find you high quality, growing yields. As is the case with all income investments, stay focused on the payouts - don't worry about the chart. If you're worried about the 'underperformance', then switch to a vehicle, like MOAT or QQQ, that more closely aligns with what you care about. Summary As we've laid out, SCHD is primarily, in our view, an income investment. Sure, it will probably appreciate over time, but the chart to watch is the payout graph. On that front, the fund hasn't faltered. Much of the fear around recent SCHD underperformance has come from those seeking the wrong thing from the fund. Thus, we can confidently say to you, as an SCHD investor, that the fund isn't broken, and that the ETF's time-tested index selection process will likely continue to procure solid yields for you over time.  Cheers!","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2431384476"}