SCHD: A Good Choice In This Wild Market (NYSEARCA:SCHD)


Introduction

The Schwab US Dividend Equity ETF (SCHD) is a solid choice for a more defensive portfolio going forward. The ETF has maintained a solid dividend yield that should remain robust going forward even in the face of uncertainty around COVID-19 due to the fund’s structure of only buying companies with 10-year track records of maintaining dividends. The ETF charges an expense ratio of just 0.06%, trades below market multiples, and has even outperformed the index it tracks on a three-year basis. Thus, SCHD remains one of my favorite ETFs out there, especially for those looking for diversification outside of technology in a higher-yielding ETF.

Data by YCharts

SCHD hasn’t performed quite as well as market ETFs like the Dow Jones Industrial Average ETF (DIA) or the SPDR S&P500 ETF (SPY) but considering SCHD holds much smaller positions in technology and none of the large tech names like Apple (AAPL) and Microsoft (MSFT), both of which are held by DIA and SPY, SCHD has done very well in my opinion. SCHD has even managed to outperform the Dow Jones US Dividend 100 index that it tracks.

Maintaining Robust Distributions

SCHD has a strong track record of paying increasing distributions. The dividend has increased for 8 straight years with over 10% growth the last 5 years. The dividend has even increased through the first two quarters of 2020 despite a coronavirus disruption across equity markets, something most funds cannot claim to have done.

Source: Seeking Alpha

Source: Seeking Alpha

If SCHD can maintain this year’s quarterly payout of about $0.44, the final payout in 2020 would come to $1.76. 2019’s final total payout was $1.7242, so the growth is minimal year over year, but I think any dividend growth in a pandemic environment is impressive. With the ETF trading at $57.37 as of the time of writing, this works out to a yield of 3.07% by the end of this year, which is still above the historical TTM yield.

Source: Seeking Alpha

Updated Portfolio Construction And Holdings

When I wrote my first article on SCHD, it’s top three largest holdings were Home Depot (HD), Exxon Mobil (XOM), and Intel (INTC). The fund has since rebalanced its portfolio, removing Home Depot and Intel. Exxon Mobil is still held by the fund but is no longer in the top 10 holdings. The fund’s largest sector has now shifted to financials, rather than Consumer Non-cyclical as it was earlier this year.

Source: ETF.com SCHD Overview

As for the individual holdings, United Parcel Services (UPS) is now the top holding. As of the time of writing, UPS is trading at a new all-time high as more people than ever are ordering packages online. I think delivery companies like UPS are likely to continue benefitting from the shift to online retail and e-commerce.

Source: ETF.com SCHD Overview

Qualcomm (QCOM), Texas Instruments (TXN), BlackRock (BLK), and Pfizer (PFE) round out the top 5 holdings and all make up more than 4% of the entire portfolio each. All of the top 10 companies are, in my opinion, likely to continue to be quite secure with their dividends going forward and should remain relatively stable even in a slower economy. The top 10 holdings make up a very considerable 42% of the entire fund, so shareholders should be comfortable with these top 10 holdings going forward if they plan on holding this ETF.

Current Value

The most recent data available has the fund trading at a multiple of earnings of around 15. By now, this is likely slightly higher as this data is of June 30, 2020. The ETF has increased in value a little over 10% since, so this might be closer to 16 or 17 by now. Still, this remains a below-market multiple. Even better is the fund’s price to cash flow ratio of just 8.08 and the return on equity of 27%. The fund holds some of the highest quality and most stable businesses in America (as reflected in that ROE number) and you’re getting them for below a market multiple in this ETF.

Source: Schwab SCHD Product Page

Thus, I would have no problem buying this ETF here. While my own portfolio is concentrated in more small-cap growth names, if I were looking for a low-cost large-cap dividend ETF with reasonable valuation metrics SCHD would be at the top of my list.

Risks

Every investment has risks, and this is especially true with equities and funds that hold equities like SCHD. Here are the main risks I’ve identified for SCHD:

  • There may be opportunity costs with this ETF if technology continues to thrive in a pandemic world and tech outperforms more value-oriented funds like SCHD.
  • SCHD’s largest sector is now financials. Low interest rates may continue to be a drag on banks that tend to make money in higher interest rate environments. That said, SCHD’s largest financial holding is the asset manager BlackRock, which benefits from higher stock markets (and thus lower rates) as they collect % of asset fees from clients.
  • Although SCHD has managed to maintain slight dividend growth this year, a pandemic environment is highly unpredictable and could change quickly. Companies that have paid increasing dividends for a dozen years straight could find themselves in a pickle if the pandemic adversely affects their business in unexpected ways.

Conclusion

I continue to think that SCHD is a solid investment that shareholders can be confident holding over time. The fund consistently yields around 3% and has been able to maintain that even this year. Despite a recovery from March, the fund currently trades for earnings multiples below most markets overall. SCHD is a solid investment right now and is likely to continue to be for some time in my opinion.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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