SCHH: Diverse Exposure To Real Estate But Lacks Dividend Growth

seekingalpha08-20

Schwab US REIT ETF offers exposure to real estate sector with low expense ratio, modest dividend yield, and diverse holdings strategy.The dividend yield sits at a modest 3%. However, dividend growth ...

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However, dividend growth ...</p>\n\n<a href=\"https://seekingalpha.com/article/4715801-schh-diverse-exposure-to-real-estate-but-lacks-dividend-growth\">Source Link</a>\n\n</div>\n","source":"seekingalpha","html":"<!DOCTYPE html>\n<html>\n<head>\n<meta http-equiv=\"Content-Type\" content=\"text/html; charset=utf-8\" />\n<meta name=\"viewport\" content=\"width=device-width,initial-scale=1.0,minimum-scale=1.0,maximum-scale=1.0,user-scalable=no\"/>\n<meta name=\"format-detection\" content=\"telephone=no,email=no,address=no\" />\n<title>SCHH: Diverse Exposure To Real Estate But Lacks Dividend Growth</title>\n<style type=\"text/css\">\na,abbr,acronym,address,applet,article,aside,audio,b,big,blockquote,body,canvas,caption,center,cite,code,dd,del,details,dfn,div,dl,dt,\nem,embed,fieldset,figcaption,figure,footer,form,h1,h2,h3,h4,h5,h6,header,hgroup,html,i,iframe,img,ins,kbd,label,legend,li,mark,menu,nav,\nobject,ol,output,p,pre,q,ruby,s,samp,section,small,span,strike,strong,sub,summary,sup,table,tbody,td,tfoot,th,thead,time,tr,tt,u,ul,var,video{ font:inherit;margin:0;padding:0;vertical-align:baseline;border:0 }\nbody{ font-size:16px; line-height:1.5; color:#999; background:transparent; }\n.wrapper{ overflow:hidden;word-break:break-all;padding:10px; }\nh1,h2{ font-weight:normal; line-height:1.35; margin-bottom:.6em; }\nh3,h4,h5,h6{ line-height:1.35; margin-bottom:1em; }\nh1{ font-size:24px; }\nh2{ font-size:20px; }\nh3{ font-size:18px; }\nh4{ font-size:16px; }\nh5{ font-size:14px; }\nh6{ font-size:12px; }\np,ul,ol,blockquote,dl,table{ margin:1.2em 0; }\nul,ol{ margin-left:2em; }\nul{ list-style:disc; }\nol{ list-style:decimal; }\nli,li p{ margin:10px 0;}\nimg{ max-width:100%;display:block;margin:0 auto 1em; }\nblockquote{ color:#B5B2B1; border-left:3px solid #aaa; padding:1em; }\nstrong,b{font-weight:bold;}\nem,i{font-style:italic;}\ntable{ width:100%;border-collapse:collapse;border-spacing:1px;margin:1em 0;font-size:.9em; }\nth,td{ padding:5px;text-align:left;border:1px solid #aaa; }\nth{ font-weight:bold;background:#5d5d5d; }\n.symbol-link{font-weight:bold;}\n/* header{ border-bottom:1px solid #494756; } */\n.title{ margin:0 0 8px;line-height:1.3;color:#ddd; }\n.meta {color:#5e5c6d;font-size:13px;margin:0 0 .5em; }\na{text-decoration:none; color:#2a4b87;}\n.meta .head { display: inline-block; overflow: hidden}\n.head .h-thumb { width: 30px; height: 30px; margin: 0; padding: 0; border-radius: 50%; float: left;}\n.head .h-content { margin: 0; padding: 0 0 0 9px; float: left;}\n.head .h-name {font-size: 13px; color: #eee; margin: 0;}\n.head .h-time {font-size: 11px; color: #7E829C; margin: 0;line-height: 11px;}\n.small {font-size: 12.5px; display: inline-block; transform: scale(0.9); -webkit-transform: scale(0.9); transform-origin: left; -webkit-transform-origin: left;}\n.smaller {font-size: 12.5px; display: inline-block; transform: scale(0.8); -webkit-transform: scale(0.8); transform-origin: left; -webkit-transform-origin: left;}\n.bt-text {font-size: 12px;margin: 1.5em 0 0 0}\n.bt-text p {margin: 0}\n</style>\n</head>\n<body>\n<div class=\"wrapper\">\n<header>\n<h2 class=\"title\">\nSCHH: Diverse Exposure To Real Estate But Lacks Dividend Growth\n</h2>\n\n<h4 class=\"meta\">\n\n\n2024-08-20 17:44 GMT+8&nbsp;&nbsp;&nbsp;<a href=https://seekingalpha.com/article/4715801-schh-diverse-exposure-to-real-estate-but-lacks-dividend-growth><strong>seekingalpha</strong></a>\n\n\n</h4>\n\n</header>\n<article>\n<div>\n<p>Schwab US REIT ETF offers exposure to real estate sector with low expense ratio, modest dividend yield, and diverse holdings strategy.The dividend yield sits at a modest 3%. However, dividend growth ...</p>\n\n<a href=\"https://seekingalpha.com/article/4715801-schh-diverse-exposure-to-real-estate-but-lacks-dividend-growth\">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":"AMT","symbol_name":"美国电塔","start_time":0,"source_url":"https://seekingalpha.com/article/4715801-schh-diverse-exposure-to-real-estate-but-lacks-dividend-growth","article_id":"2460078262","we_media_id":null,"thumbnails":["https://static.seekingalpha.com/cdn/s3/uploads/getty_images/1688771026/image_1688771026.jpg"],"rights":null,"url":"https://stock-news.laohu8.com/highlight/detail?id=2460078262","pubTimestamp":1724147053,"sourceInfo":{"source_id":"seekingalpha","name":"Seeking Alpha"},"weMediaInfo":null,"summary":"Schwab US REIT ETF offers exposure to real estate sector with low expense ratio, modest dividend yield, and diverse holdings strategy.The dividend yield sits at a modest 3%. 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However, dividend growth has historically been lacking.SCHH may benefit from future interest rate cuts as the underlying assets will be able to access debt capital at more affordable rates.SCHH underperforms higher yielding peers such as Cohen & Steers Quality Income Realty Fund.   Richard Drury Overview Real Estate continues to be one of the worst performing asset classes since the rise of the federal funds rate. When comparing the real estate sector (XLRE) against many other sectors, we can see that real estate remains down over the last three-year period. However, I believe that the outlook of the sector will be improving and the time we have to build exposure may be limited as conditions continue to get better. Economic indicators are starting to point to interest rates being cut in the near term and this can be a positive catalyst for real estate which can help close the performance gap. Data by YCharts I've been searching for some good opportunities within the sector and this led me to Schwab US REIT ETF (NYSEARCA:SCHH). SCHH operates as an ETF that maintains exposures to equities within the real estate sector. The fund was launched back in 2011, which means we have over a decade worth of performance history to reference. SCHH is managed by Charles Schwab and sports a very affordable expense ratio of only 0.07% and can make this a great choice for gaining exposure to the sector. Knowing which REITs to add to your portfolio can be difficult, so an ETF like this certainty has the ability to make the process a lot easier for investors that prefer a more hands-off experience. SCHH has a modest dividend yield of about 3% and can serve as a nice boost of income to a diversified portfolio. However, I am admittedly disappointed in the lackluster level of dividend growth here. As an investor that values the dividend income generated from my portfolio, I can't help but feel that I would be better off individually investing in some of the holdings within SCHH because I would be able to lock in a higher yield. However, SCHH still does serve as a valuable holding and can provide instant diversification across the sector. Holdings Strategy SCHH's value comes from the wide variety of exposure that you gain across many sub industries of real estate. Taking a look at the most recent fact sheet reveals that SCHH maintains a majority weight in retail REITs, accounting for 14.21% of their portfolio. This likely includes exposure to real estate businesses focusing on properties within shopping malls, outlet plazas, or even some mixed use buildings. This is followed by exposure to telecom tower REITs and Industrial REITs, making up 12.49% and 12.44% respectively. I really like the level of diversity you get here as the wide reach allows for shareholders to gain from increased demand of any one of these sectors.   SCHH Fact Sheet Just as an example, AI continues to be a growing segment that is creeping its way through almost all sectors. As a result of the increased demand for AI, there is an equally growing rise in the demand for data centers. Data tells us that there is an estimated 160% increase in demand for data center power to keep up with the growing trends. SCHH maintains a 9.8% exposure to data center REITs and influences like this can be a positive catalyst for the ETF over time. When looking at the top holdings within SCHH, Prologis (PLD) is the largest individual position within. This is followed by positions in American Tower Corp (AMT) and Equinix (EQIX), accounting for 7.56% and 5.85% of the portfolio respectively. SCHH maintains exposure to about 119 different positions, and the top ten positions account for approximately 47.5% of the total portfolio weight. For comparison, I've pulled a total return view for each of the top five holdings, which also includes Welltower (WELL) and Simon Property Group (SPG). As we can see, most of these holdings outperform the overall real estate sector (XLRE) with AMT being the only exception. Data by YCharts It's no coincidence that SCHH maintains top exposure to holdings that have outpaced the general real estate sector. This is due to the underlying holding criteria implemented to avoid poor holdings. For instance, holdings are only eligible if they maintain a minimum float adjusted market cap of at least $200M. If a holding's market cap falls below $100M for two quarters in a row, SCHH will eliminate the position. SCHH also strategically excludes asset classes like mortgage REITs, which are known to consistent deteriorate in price. By maintaining exposure to underlying assets that maintain market caps above $200M and are continuing to actively grow, SCHH can limit exposure to holdings that are highly volatile and may lack the consistent levels of earnings growth or free cash flow. Positive Outlook Interest rates have had a huge impact on the pricing of these REITs. We can see that SCHH was impacted by the aggressively rising interest rates that the Fed implemented throughout 2022 and 2023. As interest rates were aggressively hiked, we saw the price of SCHH retract from its 2021 highs and fell down to about $15 per share. Higher interest rates aren't typically beneficial for the real estate sector for many reasons. Firstly, higher interest rates directly translate to higher borrowing costs. Lots of REITs depend on access to cheap debt as a way to fund operational growth through different initiatives like acquisitions, development of new buildings, and research and development for example. As interest rates rise, this makes it a lot less appealing for these businesses to hold debt on the balance sheet if the debt was taken out on a floating rate basis. This would mean that REITs are paying out higher amounts of their earnings towards debt obligations and can impact overall profitability. Naturally, this environment causes REITs to start to shift to a more defensive standpoint by focusing on debt reduction, cost efficiencies, and delaying any sort of capital intensive projects as a way to offset higher interest expenses. Data by YCharts On the opposite end of the spectrum, we can see how low-interest rates can be hugely beneficial for REITs. When the federal funds rate was cut to near zero levels following the pandemic in 2020, we can see that the price of SCHH rapidly grew and momentum only started to shift to the downside once talks of rate increases happened. Lower interest rates means that these same REITs can now access debt capital at more affordable rates, and it becomes cheaper and more cost-efficient to hold debt on the balance sheet. With this in mind, I believe that the shifting market conditions are leaning more towards an interest rate cut happening in the near term. Throughout 2024 the Fed has kept rates unchanged as the awaited more data to roll in surrounding the inflation rate, labor market, and consumer spend. However, inflation rates have consistently trended downward now for four consecutive months. The latest inflation rate now sits at the 2.9% level, which is getting closer to the Fed's 2% target. Simultaneously, the labor market seems to be weakening as the unemployment rate has steadily increased over the last twelve months and now sits at the 4.3% level.   JPMorgan Lastly, the US Presidential elections are still upcoming at the tail end of 2024. As investors await the outcome of elections, I anticipate markets to see higher levels of uncertainty and volatility during this time. Data compiled by JPMorgan shows that the Fed have historically made changes to the federal funds rate more frequently than not during election years. In fact, 2012 was the over election year over the last 40+ years that did not see a change in the federal funds rate. I believe that a combination of these factors will incentivize the Fed to begin cutting interest rates. This is especially true if the unemployment rate continues to move upward. There's a possibility that more households will start to cut back on their spending in response to rising unemployment. In addition, consumer spending may not grow because households will be actively trying to cut back on unnecessary spending and retain more of their cash. In response to this, the Fed may have to ultimately cut rates as a way to stimulate the economy. Dividend The starting dividend yield of SCHH sits at a modest 3%. Unfortunately, this may not be large enough to create a sizeable income stream without the need for a large upfront investment. However, the modest yield is part of the tradeoff that investors will have to make in exchanges for a high level of diversity to some of the best performing REITs in its class. As much as I like the wide range of holdings, I personally think that the dividend growth and starting yield could be a bit more consistent here. For instance, here are some of the dividend yields for some of the top holdings within SCHH.  Prologis (PLD): dividend yield of 3.1% Simon Property Group (SPG): dividend yield of 5.2%. Realty Income (O): dividend yield of 5.2% Digital Realty Trust (DLR): dividend yield of 3.2%.  As a result, all of these alternative REITs will grant investors a larger upfront distribution from capital. However, SCHH may still be beneficial as it reduces the single stock risk associated with holdings some of these top positions individually. The distributions for SCHH are issued on a quarterly basis and vary based on the fund's performance. Over time, SCHH has lacked any meaningful dividend growth and this also makes it a bit unattractive for investors that value income. For instance, the dividend has only increased at a CAGR (compound annual growth rate) of 0.58% over the last five years. Despite the lack of growth on this front, long-term investors that prefer the ETF route can still grow their annual income through continued reinvestment of the distribution as well as regularly adding additional capital to their position. To visualize this, I ran a back test of an initial investment of $10,000 starting at the beginning of 2015. This back test assumes that all distributions were reinvested back into SCHH and you also added a fixed contribution of $500 into SCHH on a monthly basis throughout the entire holding period.   Portfolio Visualizer In year 1 of your investment, you would have only received $348 from your investment. However, fast forwarding to the full year of 2023 reveals that your income received from SCHH would have grown to a total of $2507. This would represent a 7x growth in your income despite SCHH not regularly increasing the rate of the distribution over time. This prompted me to also look at SCHH's most recent 2024 annual report to take a look at how the distribution is typically funded. We can see that the distribution amounts have varied between 2019 and 2024, dropping as low as $0.40 per share and rising as high as $0.67 per share.   SCHH Annual Report In the latest 2024 data, the distribution was fully covered by the combination of net investment income and net realized gains. Net investment income is comprised of the interest and dividends that SCHH collects from its holdings while the net realized gains are a reflection of the buying and selling happening from individual positions. We can see that in years where the fund had net realized losses, the distribution amount was typically reduced. On a more positive note, I do like that SCHH has the ability to retain earnings on stronger years in an effort to grow the fund's NAV, which will let shareholders experience some price appreciation as well. I am specifically referring to the performance in 2022, as net realized gains reached $3.79 per share, which was more than enough to fully cover the distribution that year. Despite the strong performance, the fund didn't aggressively increase the distribution and as a result, SCHH saw its NAV growth up to $23.30 that year. Downsides I do like SCHH as it plays a clear role to adding some diverse exposure to the sector to an investor's portfolio. However, there are some downsides that can make the fund less appealing. For instance, the low starting dividend yield and low dividend growth rate makes it a bit unattractive for investors that value consistent income growth over time without needing to consistently add more capital. The first alternative fund that comes to mind would be Cohen & Steers Quality Income Realty Fund (RQI) which hovers over double the starting yield and exposure to a lot of similar holdings within. While the fund's structure is a bit different since it's a closed end fund, the total return performance of RQI far outpaces that of SCHH. SCHH may provide a higher level of capital appreciation due to its ETF structure that can allow for greater price mobility, but RQI's total return including the distribution has been higher. Data by YCharts There are plenty of investors that would rather collect a higher starting yield and less capital appreciation if it meant a higher total return overall. Since RQI's total distribution rate is over twice the amount of SCHH, it also requires half the amount of invested capital to produce a similar amount of distribution income. For instance, if we were to invest $100k in both of these funds, here are the annual income totals you'd receive.  SCHH: $100k invested would yield approximately $3,000 annually. RQI: $100k invested would yield approximately $7,500 annually.  However, both of these funds also have the downside of distributions being classified as ordinary dividends. Ordinary dividends have less favorable tax consequences than qualified dividends, which means that these funds would be best utilized in a tax advantaged account. Additionally, SCHH remains vulnerable to changes in the interest rate environment. While I do believe that the data supports interest rate cuts are on the horizon, I do not know how aggressive or light those cuts may be. We have to consider the possibility that interest rate cuts do not happen in 2024. This could leave the price of SCHH flat or even react to the downside. Takeaway  In conclusion, SCHH provides a diverse exposure to the real estate sector and will likely benefit from the catalyst of future interest rate cuts. As interest rates are cut, REITs should ultimately benefit as lower rates can fuel more operational growth and reduce the debt burdens. However, SCHH does underperform higher yielding peers which can make it a bit hard to recommend. The ETF structure does allow for some additional price appreciation to be experienced here but still underperforms peers like RQI in total return. Therefore, I rate SCHH as a hold as the performance here in total return and dividend growth isn't compelling enough to warrant a buy.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":0},"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":"4.29.2","shortVersion":"4.29.2","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/2460078262"}