The Schwab U.S. Dividend Stocks ETF (SCHD) is one of the most popular dividend ETFs on the market today, with a whopping $63.7 billion in assets under management (AUM).
The fund recently made headlines by implementing a 3-for-1 split that took effect on October 10th. In this article, we will explain the basis and details of stock splits. But more importantly, evaluate the benefits of owning SCHD in your investment portfolio.
I'm bullish on this popular dividend ETF based on the strength of its attractive yield, diversified portfolio of highly-rated dividend stocks, and ultra-low expense ratio.
What is the SCHD ETF strategy?
According to fund sponsor Charles Schwab, SCHD's strategy is simply to invest in an index called the Dow Jones U.S. Dividend 100 Index. The index “focuses on dividend quality and sustainability.” The fund also “invests in stocks selected for their fundamental strength relative to their industry peers based on financial ratios.”
Consideration of division
SCHD, one of the most popular dividend ETFs on the market, recently made headlines by implementing a 3-for-1 stock split effective October 10, 2024. Splits of company stocks are much more common than ETFs. This is a rare case where an exchange-traded fund is split up. This separation has no fundamental impact on SCHD's investment prospects. What happened is that investors now owned 3 shares of SCHD for each share they previously owned, but the market price of the ETF was now one-third of what it would have been without the split. .
Stock splits have some small advantages, such as a lower price per share and making it easier for small investors to establish an investment. Stock splits can also increase liquidity. It can also cause an increase in option trading on the ticker (an option contract consists of 100 shares). However, that being said, the outlook for SCHD stock right now should be the same as it would have been had the split not taken place.
Many popular stocks that have undergone stock splits in the past year, such as NVIDIA (NVDA) and Broadcom (AVGO), have stock prices well above $1,000 per share, making the splits even more significant. These splits have made it much more affordable for investors to purchase single shares or lots (100) of shares. SCHD, on the other hand, was trading at just under $85 per share before the split, so the need for a split was less obvious here. You can purchase fractional shares at brokerages such as Robinhood (HOOD), which alleviates the need for stock splits to some extent.
Either way, at the end of the day, this is the same solid dividend ETF with the same holdings as before the stock split.
Portfolio of blue-chip dividend stocks
The SCHD ETF provides investors with healthy diversification. The company holds 100 stocks, and the top 10 holdings account for 41.0% of assets. Below is a summary of SCHD's top 10 holdings from TipRanks' holdings tool.
As you can see, the fund owns a number of notable dividend stocks, from top holding Home Depot (HD) to BlackRock (BLK) and Lockheed Martin (LMT).
In addition to being blue-chip dividend stocks, another thing these top holdings have in common is that they offer strong Smart Scores. Smart Score is a quantitative stock scoring system created by TipRanks. It gives stocks a score of 1 to 10 based on eight key market factors. The score is data-driven and does not involve any human interpretation. Impressively, 8 of SCHD's top 10 holdings earn a Smart Score of 8 or higher.
The Smart Score system also rates SCHD highly, giving it an ETF Smart Score of 8, which is equivalent to Outperform.
favorable evaluation
Besides being a high-dividend stock, another good thing about SCHD's holdings is that it's fairly cheap overall. The ETF's holdings currently trade at a price-to-earnings ratio of 17.6 times. This is another reason I'm bullish on ETFs.
A P/E ratio of 17.6x isn't exactly cheap, but it's significantly more affordable than the overall market at the time, where the S&P 500 had a price-to-earnings ratio of 24.7x.
This means that SCHD and its holdings probably offer a little more downside protection than the broader market, and may have a little more upside room from multiple expansions. This fund has a beta value of 0.74. This means that SCHD's share price movement is only about three-quarters of the total market. This lends credence to SCHD's defensive nature (as discussed earlier in the valuation section), which makes it attractive to investors looking to avoid volatility.
Evaluation of SCHD performance
SCHD has delivered solid returns to shareholders over the years. As of September 30, the ETF had a three-year annualized return of 8.2%, a five-year annualized return of 13.0%, and a 10-year annualized return of 11.7%.
It's worth noting that in each of these periods, SCHD has lagged broader market funds like the Vanguard S&P 500 ETF (VOO) (for reference, VOO has posted a five-year annualized return of 15.9%). ). This is likely due to the fact that many non-dividend-paying companies have access to growth opportunities.
SCHD's underperformance relative to the S&P 500 Index (SPX) and its tracking ETFs comes at a time when the index has been supported by many large-cap tech stocks that pay low (or no) dividends. If the environment returns to favoring more value-oriented dividend stocks, SCHD could outperform the broader market. For example, SCHD slightly outperformed VOO over the past three months, a volatile period for tech stocks.
Regardless of the comparison, achieving double-digit profits over a 10-year period, as SCHD has achieved, is nothing to be scoffed at. Additionally, SCHD could provide valuable diversification for investors with large holdings of high-flying tech stocks.
SCHD offers attractive yields
The current yield on the SCHD ETF is 3.4%. This is an attractive yield, more than double the current S&P 500 yield. This is quite attractive.
Additionally, this fund has a track record of stable dividends. SCHD has paid a dividend for 12 consecutive years and has increased its dividend every year. Dividends have grown at a steady 12% over the past five years, so investors can expect their dividends to continue increasing over the long term. Unless, of course, American companies hit hard times and some companies are forced to cut their dividends.
SCHD’s low expense ratio
SCHD's bargain bin expense ratio is just 0.06%. This means that an investor with $10,000 in the fund would pay just $6 in fees per year. It's hard to argue with this expense ratio. Cheaper than the price of a fast food lunch these days.
The savings from a low-fee investment fund like SCHD can really add up over time. Assuming current expense ratios remain the same and the fund continues to generate annualized returns of 5%, an investor who puts $10,000 into SCHD will only pay $77 in fees over 10 years. .
Is SCHD stock a buy, according to analysts?
Turning to Wall Street, SCHD receives a Moderate Buy consensus rating based on 54 Buy, 37 Hold, and 10 Sell ratings assigned over the past three months. SCHD's average price target of $30.16 implies upside potential of approximately 5% from current levels.
The conclusion is
I like SCHD based on its attractive 3.4% dividend yield, diversified portfolio of highly rated blue-chip dividend stocks, relatively cheap valuations of these holdings, and the fund's investor-friendly expense ratio. I'm bullish.
The recent 3-for-1 split was an interesting development, but ultimately doesn't change much for the ETF or its holders.
One downside for SCHD is that it has lagged the broader market for many years, despite posting respectable double-digit annualized returns. As mentioned above, part of SCHD's underperformance relative to the S&P 500 is due to the superior performance of large-cap tech stocks, which are generally companies that do not pay attractive dividends.
SCHD stock can serve a valuable purpose in an investor's portfolio by providing strong dividend income and low volatility. SCHD could outperform if investors shift from growth stocks to value-oriented dividend stocks.
disclosure
