Will Schwab’s High-Yield SCHD ETF Hold Up in a Bear Market?

The prospect of a Bear Market can be as sobering as a plunge into ice water for those who have become too accustomed to a strong Bull Market run, led in recent years by soaring tech stocks. Bear Markets are the inevitable down cycle side of markets that react to geopolitical and financial events. In these cases, capital also seeks other assets for safety and returns. These asset classes, which are usually more stable and reliable, can include: 

• Bonds
• precious metals 
• defensive stocks
• real estate
• Storied dividend stocks

Exchange Traded Funds (ETF) have now expanded to include all of the above categories, adding a layer of diversification risk mitigation to the equation. ETFs are predicated on underlying indexes, so companies may meet the criteria for inclusion in multiple categories, such as being in a defensive sector (i.e., healthcare) and also in a Dividend Aristocrat sector (25 or more consecutive years of dividend increases). 

The Schwab US Dividend Equity ETF (NYSE: SCHD) is an ETF that meets several of these crossover categories, making it worth consideration for portfolio inclusion, especially during turbulent market periods. 

Schwab US Dividend Equity ETF (NYSE: SCHD)

Charles Schwab’s discount brokerage services and large catalog of funds are geared for individual investors’ needs.

A pioneer in the retail securities industry, Charles R. Schwab is essentially the father of discount brokerage. Starting his namesake firm in 1975, Schwab went on to become the largest discount securities dealer in the US. As it continued to grow, Charles Schwab & Co. also branched out into many other areas of the financial investment arena. 

With over $10 trillion Assets Under Management, Charles Schwab is currently one of largest asset managers on the globe, ranking behind BlackRock and Vanguard, and going neck and neck with Fidelity. The firm’s catalog of funds for individual and institutional investors have achieved notice for their performance, usually equaling and occasionally surpassing those of  its rivals. 

The Schwab US Dividend Equity ETF is an exchange traded fund that is designed to track The Dow Jones U.S. Dividend 100 Index. For inclusion in this index, stocks have to meet the following requirements:

• Minimum of 10 consecutive years of dividend payments.
• Floating Market Capitalization minimum of $500 million.
• Minimum Average Daily Trading Volume of $2 million.

A 4 step calculation that takes free cash flow, total debt, return on equity, indicated annual dividend, and five year dividend growth rate determines a ranking. The top 100 scoring companies are included in the index. If two companies have the same score, the one with the larger dividend gets the higher ranking.

The Schwab US Dividend Equity ETF holds stocks in a relatively close equivalent ratio to the Dow Jones U.S. Dividend 100 Index, with perhaps a couple of additional stocks, at any given time. It attempts to parallel, and, when possible, exceed the returns of the underlying index. 

Sector wise, SCHD’s top 5 heaviest weighted industrial areas are:

1. Financials – 18.73%
2. Health Care – 16.67%
3. Consumer Staples – 14.37%
4. Industrials – 13.28%
5. Energy – 11.67%

The top 5 weighted holdings in SCHD are:

1. Verizon Communications – 4.47%
2. Coca-Cola – 4.44%
3. Altria Group – 4.24%%
4. ConocoPhillips – 4.23%
5. Lockheed Martin – 4.21%

A $10,000 investment made 10 years ago in SCHD that reinvested dividends would have a cumulative value of $29,277.00.

How SCHD Addresses Bear Market Concerns

SCHD’s mix of Dividend Aristocrat, Defensive Cyclical, and Essential Goods and Services stocks offer protections against volatile markets heading into bearish territory.

Due to the composition of the Dow Jones U.S Dividend 100 Index, SCHD’s portfolio contains both a sizable collection of Dividend Aristocrat, Defensive Cyclical, and Essential Services and Goods stocks. Bear Markets are less prone to affect these companies as much as high growth ones for several reasons:

• Dividend Aristocrat stocks have 25 or more years in a row of dividend increases. As the market has experienced Bear Markets in 2022 at the start of the Ukraine War, in 2020 during the pandemic, the 2008 subprime mortgage bank meltdown, and in 2001 following 9/11, these companies have demonstrated their resilience by continuing to increase dividends despite unfavorable economic climates. 
• Essential Services and Goods would include sectors such as:
  • Healthcare
  • Communications Services
  • Transportation
  • Utilities
  • Food and Beverages

• Cyclical sector stocks include industries such as:
  • Mining and chemicals
  • Financials
  • Real Estate
  • Manufacturing
  • Construction

Bearing this in mind, SCHD would likely fare well in the event of a Bear Market for the following reasons:

• 77% of the portfolio is weighted towards its top 25 stocks, which a majority of them fall in at least one of the above categories, if not two.
• The dividend payout ratios for the bulk of the companies is average or below average, indicating substantial cash reserves on hand to raise dividends even during economic downturns. 
• The bottom 40 or so of the portfolio only accounts for under 5% of its weighting, so a quick evaluation of SCHD’s trends can be gleaned from the top 25.
• Many of the companies that are paying dividends for over a decade have since been valued more fairly and are less likely to drop in price during a Bear Market, as opposed to some biotech or AI stocks whose prices may be fueled by overspeculation.