Picking individual stocks is not an easy feat, and not everyone has the stomach for it. For one thing, it's hard to balance growth with income. For example, one can go with long-term winners but low-yielders like Apple (AAPL), or Broadridge Financial Solutions (BR), but sacrifice meaningful income in the near to medium term for the sake of long-term growth.
That's why a better idea for individual investors may be to buy ETFs that give the best of both worlds. This brings me to the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) which pays a meaningful dividend and has outperformed the market over the long run. As shown below, SCHD has given investors a 197% total return over the trailing 10 years, besting the 170% of the S&P 500 (SPY).
I last covered SCHD here back in October with a 'Buy' rating, and while some viewed the ETF as being 'dead money' back then, it appears that patience has paid off. This is reflected by SCHD's 11% total return since then, nearly matching the 12.8% rise in the S&P 500 over the same timeframe.
SCHD's strong performance in recent months may have been due to a deep disconnect between the operating fundamentals of its holdings and their share prices. But despite SCHD's robust return over the past 3 months, it remains largely unchanged from where it was a year ago, with a 2% price return vs 24% from SPY, as shown below.
In this article, I provide an update and discuss why SCHD remains a top pick for diversification, income, and potentially strong returns from here, so let's get started!
Why SCHD?
SCHD is a dividend-focused ETF that tracks the total return of the Dow Jones U.S. Dividend 100 Index, and run by the well-renowned financial institution, Charles Schwab (SCHW). Buying SCHD is an 'easy button' way for the investor to get broad diversification into quality moat-worthy dividend stocks without having to commit substantial capital and do portfolio balancing on their own.
At present, SCHD has AUM of $52 billion, giving it plenty of liquidity on the trading exchange, with over 104 different holdings. SCHD also falls into the Morningstar Category of being 'Large Value', and that means it has no exposure to stocks that are priced for perfection like Nvidia (NVDA) and Tesla (TSLA).
Instead, SCHD strikes me as being a common sense type of investment, as it comes with a very reasonable portfolio weighted average PE ratio of 15.1, especially compared to that of the S&P 500, which carries a PE of 24. As such, SCHD may appeal more to value investors.
Plus, SCHD may carry more downside protection should the market react badly again to the notion of a 'higher-for-longer' interest rate environment. That's because higher interest rates mean a higher discount rate on future cash flows, and this could negatively impact the valuation of growth companies in the tech-heavy S&P 500 due to their elevated valuations.
Meanwhile, SCHD is well diversified with Industrials, Healthcare, Financials, Technology, and Consumer Defensive comprising the top 5 sectors. The weightings of the aforementioned sectors range from 12% (Consumer Defensive) to 17% (Industrials), and on a combined basis, these top 5 sectors comprise three-quarters of the portfolio total. As shown below, the top 10 holdings include stocks with strong dividend growth such as Broadcom (AVGO), AbbVie (ABBV), Home Depot (HD), Amgen (AMGN), and Texas Instruments (TXN).
SCHD's top holdings carry moat-worthy characteristics that should serve them well in 2024 and beyond. For example, SCHD's top holding, Broadcom, posted fiscal fourth quarter results that topped expectations and offered strong guidance for 2024. This includes expectations for semiconductor revenue to grow in the mid-to-high single digits during fiscal 2024. It also has a 5-year dividend CAGR of 19.3%. Another top holding, Amgen, also topped expectations with 6% adjusted EPS growth in its last reported quarter, and is shareholder friendly with balanced capital returns between dividends and share buybacks. Amgen has a 5-year dividend CAGR of 10%.
Holdings like the two aforementioned names are fairly representative of SCHD's overall portfolio from a dividend growth perspective. At present, SCHD yields a respectable 3.5% and comes with 5- and 10-year dividend CAGRs of 13.1% and 11.4%, respectively. As shown below, SCHD scores an A+ Dividend Grade compared to the ETF universe.
At the same time, SCHD charges a very low expense ratio of just 0.06%, which sits well below the 0.49% median across all ETFs. This also edges out the expense ratio of SPY (the SPDR S&P 500 ETF), which charges a 0.09% expense ratio.
Risks to SCHD include potential for economic headwinds in 2024, which could be spurred by high interest rates and/or a pullback in consumer spending. A pullback in the economy could also affect SCHD more than SPY, considering the former's higher exposure to Industrials, which are more cyclical in nature.
Lastly, I continue to see value in SCHD at the current price of $76.59 with a 3.5% TTM Dividend Yield. While there are certainly higher yielding income vehicles out there, it's simply hard to beat SCHD's diversification and exposure to quality large cap dividend payers, and its dividend growth track record. Considering the moat-worthy attributes of SCHD's underlying holdings in the US Dow 100 Index, I believe it's not unreasonable to assume a long-term 6-7% annual EPS growth rate on a total portfolio basis, which when combined with the dividend yield could match or beat the long-term return of the S&P 500.
Investor Takeaway
Overall, SCHD remains an attractive option for investors looking to balance income and growth in their portfolio. Its focus on quality large cap dividend payers, low expense ratio, and strong historical performance make it a solid choice for diversification and long-term investing. While there are always risks to consider, I believe the potential benefits from long-term ownership of this ETF outweigh them, especially considering that the risks are spread over 100+ individual stocks. As such, I maintain a 'Buy' rating on this ETF for its sleep-well-at-night attributes and potentially strong returns from here.
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