SCHD’s Strategy Focuses on Concentrated Stocks
A retiree, aged 63, has invested $400,000, choosing the Schwab US Dividend Stock ETF (NYSEARCA:SCHD) for its solid income potential and a diverse selection of stocks. Currently, the top ten holdings comprise 41% of the fund, equating to about $164,000. For a fund managing $94 billion, this concentration warrants some careful consideration.
Investment Approach and Income Sources
SCHD monitors the Dow Jones U.S. Dividend 100 Index, focusing on companies boasting strong balance sheets and consistently increasing dividends for at least a decade. Its income model is straightforward—collect dividends from established, cash-flow-positive firms, with annual re-evaluations occurring in March. Investors can enjoy a yield of 3.27%, coupled with an expense ratio of just 0.06%, making it one of the more budget-friendly options available.
This investment strategy is particularly beneficial for retirees. For instance, Merck (NYSE:MRK) recently raised its quarterly dividend from $0.77 to $0.85, while Bristol Myers Squibb (NYSE:BMY) slightly adjusted theirs from $0.62 to $0.63. Such consistent incremental increases provide a reliable income stream.
Concentration versus the S&P 500
The allocation of the leading ten companies within the fund hovers around 3% each. Qualcomm leads the pack, followed by Texas Instruments, UnitedHealth, Chevron, Coca-Cola, ConocoPhilips, Verizon, and Amgen. While the head of the index is heavily populated by massive tech firms, the top stocks in SCHD represent a more concentrated weight than the S&P 500’s top 10, which stands at about 36%.
However, sector allocation adds another layer of complexity. After reducing the energy weight from 24% in the latest restructuring, it remains close to 16%, featuring two major oil firms among the top five. The healthcare sector makes up around 18%, supported by three pharmaceutical companies. That said, the risk tied to a single stock might be more pronounced than the 100-company count suggests.
Performance Outlook
Over the past year, SCHD has seen a return of 29%, outpacing the SPY’s 27%, likely due to a shift towards value investments. Yet, looking over a five-year horizon, SCHD’s total return is 50%, which trails SPY’s impressive 79% significantly. This discrepancy illustrates what SCHD investors faced by sidestepping the AI-driven market surge from 2023 to 2025. Despite trailing SPY overall—233% versus 258%—the gap has narrowed a bit over a prolonged timeline.
Considerations and Trade-offs
- Concentration Variation: March is the sole month for resetting weights, meaning that those purchasing in different months own differing stakes, as stocks fluctuate significantly.
- Sector Weighting: A predominance in energy and healthcare can lead to the fund responding unusually to fluctuations in oil or drug pricing policies compared to the broader market.
- Growth Opportunity Costs: The dividend-focused nature of SCHD means missing out on many mega-cap tech stocks that have driven returns over the last decade.
Integrating SCHD into a Portfolio
SCHD can be an essential income-focused component for retirees wanting both yield and quality at a minimal cost. Given the concentration among its top 10 holdings, it’s prudent to keep allocations to about 30% to 40% within an equity portfolio. The Vanguard High Dividend Yield ETF (NYSEARCA:VYM) includes around 620 stocks with a top 10 concentration of nearly 24% and a five-year return of 69%. Alternatively, the iShares Core Dividend Growth ETF (NYSEARCA:DGRO) features high-profile tech like Apple and Microsoft, filling in the gaps where SCHD might fall short. Pairing SCHD with either can mitigate single-stock risks while maintaining the income focus that appeals to the 63-year-old investor initially drawn to this fund.
