Saturday, December 16, 2017

Recent Buy: SCHD

Earlier this year I opened a position in the Vanguard High Dividend Yield ETF (VYM), an exchange-traded fund (ETF). In my most popular Seeking Alpha article to date, I presented the top holdings of 27 Dividend ETFs. Of these ETFs, VYM impressed me the most, with exceptional ratings from three leading authorities on ETFs, a solid 2.79% yield, impressive 3-year returns of 39%, and a very reasonable expense ratio.

Last month, when I updated my Dividend ETF analysis and presented ratings on 32 Dividend ETFs, it was the Schwab US Dividend Equity ETF (SCHD) that impressed the most.

About ETFs

ETFs are investment funds that hold assets like stocks, commodities, or bonds. Ownership of the assets under management is divided into ETF shares, which are traded on public stock exchanges much like shares of stocks. ETF shareholders are entitled to a proportion of profits, such as earned interest or dividends received.

Investing in ETFs provides several benefits, including instant diversification and passive investment. However, you have no control over the makeup of the ETF or its turnover rate. The investment manager determines the ETF's makeup and trading frequency and charges a recurring annual fee, expressed as the ETF's expense ratio.

Dividend ETFs specialize in stocks that regularly pay and increase dividends.

About the Schwab US Dividend Equity ETF

The Fund’s goal is to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Dividend 100™ Index.

The Dow Jones U.S. Dividend 100 Index is designed to measure the performance of high-dividend-yielding U.S. stocks with a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios.

The starting universe for the index is the Dow Jones U.S. Broad Market Index, which includes the 2,500 largest U.S. stocks based on full market capitalization. Real estate investment trusts (REITs), master limited partnerships, preferred stocks, and convertibles are excluded from the index.

According to the ETF's Summary Prospectus, "all index eligible stocks must have sustained at least 10 consecutive years of dividend payments, have a minimum float-adjusted market capitalization of $500 million USD and meet minimum liquidity criteria. The index components are then selected by evaluating the highest dividend yielding stocks based on four fundamentals-based characteristics — cash flow to total debt, return on equity, dividend yield and 5-year dividend growth rate. Stocks in the index are weighted based on a modified market capitalization approach. No single stock can represent more than 4.5% of the index and no single sector can represent more than 25% of the index, as measured at the time of index construction, reconstitution and rebalance. The index composition is reviewed annually and rebalanced quarterly."

Presently, SCHD holds 98 different stocks.

Below are two pie charts, courtesy of, depicting the sector distribution of SCHD's holdings, and the percentage of assets under management for the top 10 holdings:
SCHD's performance is quite impressive, as captured in this graphic from Morningstar:
As for distributions, SCHD, like other dividend ETFs, does not pay consistent quarterly dividends. Here is a screenshot showing the dividends (rounded to cents) over a 5-year period:
Source: Google Finance

The good news is that SCHD's annual dividend continues to increase year-over-year, despite the quarter-to-quarter changes:

Pay Date Dividend  Year  Dividend Pay Date Dividend  Year  Dividend 
 2012-03-23 0.1379 2015-03-28 0.2699
2014-09-250.2544 2017-09-22 0.3439
2014-12-280.275420141.0469 2017-12-?? ??2017??
Source: Morningstar


Here are ratings from four different sources.

The XTF Rating for an ETF is based on a proprietary statistical analysis of Structural Integrity and Investment Metrics producing a score between 0 and 10 with 10 being the best.

Structural Integrity quantifies an ETF's structural characteristics such as cost, efficiency, tracking error, liquidity, and capital gains distributions. Investment Metrics quantifies an ETF's investment characteristics such as risk-adjusted performance, earnings yield, dividend yield, momentum, and diversification.

SCHD's XTF Rating: relays the ratings of FactSet Research Systems, which provides a letter grade that averages Efficiency and Tradability scores. The included number score is the so-called Fit score.

Efficiency measures how well a fund delivers on its core promise to investors, focusing on factors like tracking error, expenses, structural risks, and tax exposure. Tradability is a measure of how well a fund can be traded in retail and institutional quantities, considering both the liquidity of the fund and its underlying holdings. ETF's Fit score compares each fund against a relevant broad-market portfolio and evaluates its risks, tilts, and returns against a neutral benchmark.
SCHD's Rating:
SCHD also earns an MSCI badge, which is assigned to ETFs with an MSCI ESG Fund Quality Score ranked in the top 20% against the scores of other funds within the same peer group.

The ETFdb Realtime Ratings are calculated relative to other funds in the same ETFdb category. Ratings range from A+ to C, on each of six different metrics: Liquidity, Expenses, Performance, Volatility, Dividends, and Concentration.

Liquidity refers to the frequency with which shares of an ETP change hands. Expenses consider the expense ratio and commission free availability. Performance measures the 52-week total return of funds. Volatility refers to the magnitude of fluctuations in the price of shares and is calculated using 200-day historical volatility. The Dividend rating is computed using Annual Dividend Yield, a backward-looking measure that uses historical distributions and share prices as inputs. Concentration considers the depth and balance of an ETF relative to its peer group.

An overall Realtime Rating for each ETP is calculated by taking the average of the rating of the six metrics mentioned above.

The Morningstar RatingTM for funds methodology rates funds based on an enhanced Morningstar Risk-Adjusted Return measure, which also accounts for the effects of all sales charges, loads, or redemption fees.

Transaction Summary

On 27 November, I bought 100 shares of SCHD @ $49.41 per share. Based on the latest quarterly dividend payment of 34.39¢ per share, this buy adds $137.56 to DivGro's projected annual dividend income (PADI). The yield on cost is 2.78%.


By investing in Dividend ETFs, I'm increasing DivGro's overall diversification. However, I prefer to keep control over the makeup of my DivGro portfolio so my investments in Dividend ETFs will remain a small portion of DivGro.

While SCHD is a smaller ETF (based on assets under management), I like SCHD's yield, ratings, very low expense ratio, and, particularly, SCHD's recent performance. Here is a comparison of SCHD and VYM, the other Dividend ETF in my portfolio:

Thanks for reading! Do you own any Dividend ETFs, or do you prefer to buy only individual stocks?


  1. Thanks for the update, it looks like a well rounded ETF. I wish they were around during the 08-09 crash so I could so how it performed then since I like to avoid big draw downs with my purchases. Aside from that it looks like great returns with instant diversification.

    1. Hi, Captain Dividend!

      Good to hear from you, again... Yes, as you point out, SCHD has not been around long enough to see evidence of its performance in a bear market. Having said that, it looks like SCHD does fairly well in downturns, based on the few we've had in this long bull market. We'll have to see what happens when the bears take over!

  2. Thank you for the analysis. We are looking to add an ETF to our portfolio. I will have to compare some candidates myself in the near future. This one will definately be on the short list. Looks solid.

    Good luck with the investment!

    1. Thanks, Pursuit 2 Freedom -- I hope the analysis gives you some baseline information to help you with your decision. I think both SCHD and VYM are good candidates. Take care and happy investing!


Contact Form


Email *

Message *

Follow by Email