Morningstar: SCHD ETF 'Gold Standard' with 3.84% Yield

Key Takeaway

• Schwab U.S. Dividend Equity ETF (SCHD) is lauded as the "gold standard" for dividend funds by Morningstar, with a 3.84% yield and 0.06% expense ratio.
• SCHD has delivered an annualized return of 12.9% since inception, outperforming the Russell 1000 Value's 11.5%.
• Top holdings include Texas Instruments, Amgen, and Coca-Cola; the fund focuses on companies with strong dividend histories and substantial payouts.

SCHD's Performance and Yield

The Schwab U.S. Dividend Equity ETF (SCHD) is widely regarded as a top performer in its category, earning the title of "the gold standard" for dividend funds from Morningstar. The ETF, which trades under the ticker SCHD, boasts a 30-day SEC yield of 3.84% and an expense ratio of just 0.06%. Ryan Jackson, a manager research analyst for passive strategies at Morningstar, highlighted the fund's cost-effectiveness, stating, "You see the benefit of the low expenses really compound over the long term, which is really where this fund has thrived."

Since its inception in 2011 through May 2024, SCHD has delivered an annualized return of 12.9%, outperforming the Russell 1000 Value's 11.5% but trailing the Russell 1000's 14.4%. This performance places SCHD in the ninth percentile of the large-value peer group. Jackson noted, "It is a very high-quality portfolio of stable stocks. These aren't going to outperform every bull market, that is not how it is designed. It has held its own during market downturns. It has stayed competitive during market rallies. That’s the benefit of threading the needle between value and quality."

Top Holdings and Strategy

SCHD's top holdings include a mix of well-established companies with strong dividend yields. The top ten holdings are:

• Texas Instruments (4.74% of assets, 2.66% dividend yield)
• Amgen (4.34%, 2.95%)
• Lockheed Martin (4.29%, 2.68%)
• Coca-Cola (4.18%, 3.04%)
• Pfizer (4.18%, 5.88%)
• Chevron (4.05%, 4.18%)
• PepsiCo (4.05%, 3.17%)
• Verizon (4.03%, 6.5%)
• Cisco Systems (3.77%, 3.49%)
• AbbVie (3.76%, 3.66%)

The ETF aims to track the total return of the Dow Jones U.S. Dividend 100 Index. Despite being a passive fund, it employs an active strategy within the index. D.J. Tierney, senior investment portfolio strategist at Schwab Asset Management, explained that Schwab played a role in designing the index's methodology. The first step involves selecting companies that have paid a dividend for ten consecutive years, excluding real estate investment trusts. These companies are then ranked by indicated yield, and the bottom half is excluded.

Methodology and Screening

The index applies four key screens to evaluate companies: cash flow versus total debt, return on equity, dividend yield, and the dividend growth rate over the last five years. Each measure is equally weighted, and the stocks are scored accordingly. After selection, the index market cap weights the stocks, with a maximum position around 4% and a sector cap of 25%.

Tierney emphasized the focus on companies with strong dividend histories and substantial payouts, stating, "We want to be focused on companies that have been paying dividends and are paying a substantial one." The end result is a portfolio of firms with healthy balance sheets that pay dividends. Morningstar's Jackson praised the index's approach, saying, "This one is pretty cut and dry and we think the transparency and simplicity of it is a really nice thing for investors. This index does a wonderful job of balancing yield with high quality."

Street Views

• Ryan Jackson, Morningstar (Bullish on Schwab U.S. Dividend Equity ETF):

  "The Schwab U.S. Dividend Equity ETF is the gold standard... You see the benefit of the low expenses really compound over the long term, which is really where this fund has thrived."

• Ryan Jackson, Morningstar (Neutral on SCHD's performance in different market conditions):

  "These aren’t going to outperform every bull market, that is not how it is designed. It has held its own during market downturns. It has stayed competitive during market rallies. That’s the benefit of threading the needle between value and quality."

Management Quotes

• D.J. Tierney, Senior Investment Portfolio Strategist at Schwab Asset Management:

  "We want to be focused on companies that have been paying dividends and are paying a substantial one."
  "This one [SCHD] is pretty cut and dry and we think the transparency and simplicity of it is a really nice thing for investors."