Why Ditching Schwab U.S. Dividend Equity ETF In the AI Era Is a Mistake

The rapid rise of artificial intelligence (AI) has transformed the stock market in recent years, powering massive gains in technology giants and growth-oriented investments. At the same time, dividend-focused funds like the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) have faced scrutiny for lagging behind broader indices dominated by AI-driven companies. 

Schwab U.S. Dividend Equity ETF tracks the Dow Jones U.S. Dividend 100 Index, selecting high-quality U.S. firms with consistent dividend payments and strong financial ratios. Its current trailing yield of around 3.8% far exceeds the S&P 500‘s lower payout, along with a low expense ratio of 0.06%. 

Yet, in an era where AI hype fuels explosive returns in tech-heavy ETFs, many investors question whether traditional dividend strategies like SCHD still hold value or risk obsolescence. But ditching the premier dividend ETF could be your biggest forced error of the AI era. 

Why SCHD Has Lagged the AI Boom

The AI surge has concentrated market gains in a handful of mega-cap tech stocks, primarily the Magnificent Seven stocks. These companies prioritize reinvesting profits into growth rather than paying substantial dividends, limiting their presence in the ETF’s portfolio.

Schwab’s top holdings include stable names like Merck (NYSE:MRK), Cisco Systems (NASDAQ:CSCO),  Amgen (NASDAQ:AMGN), and AbbVie (NYSE:ABBV), as well as energy stocks such as Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP). Sectors like energy (around 19% of the portfolio), consumer discretionary (18%), healthcare (16%), and industrials (12%) dominate the portfolio, with minimal exposure to pure AI leaders.

This year, its composition has led to underperformance. Year-to-date total returns for the ETF hovered near flat or slightly positive in many periods, while tech-focused funds like the Invesco QQQ Trust (NASDAQ:QQQ) delivered stronger gains amid ongoing AI enthusiasm. Broader indices also outpaced Schwab during speculative phases, echoing patterns from past booms where growth trumps income.

Built for Consistency, Not Speculation

Schwab U.S. Dividend Equity ETF follows a rules-based approach, screening for companies with at least 10 years of consecutive dividends, strong financial health, and balanced yield plus growth potential. Annual reconstitutions refresh the portfolio, often exiting stocks after big price run-ups reduce their yields.

This design has driven impressive long-term dividend growth — around 11% to 12% annually since inception in 2011. The result is reliable income and resilience during downturns. In 2022’s bear market, for example, the ETF held up better than growth-oriented peers, providing downside protection through payouts and a focus on quality.

Critics point to recent sluggishness, with some articles labeling dividend strategies as outdated in an AI-dominated landscape. However, Schwab’s methodology intentionally avoids chasing momentum, favoring sustainable payers over high-flyers prone to volatility.

Market Risks in the AI Landscape

Current valuations raise caution flags. The equity risk premium — the stock market’s expected return minus safe, 10-year Treasury yields — has dipped near zero or negative in 2025. It means investors are accepting substantial risk in exchange for little to no return. It signals overvaluation similar to the dot-com era or the pre-financial markets collapse in 2008.

Extreme concentration in tech amplifies risks. The Magnificent 7 represent about 35% of the S&P 500. If AI investments disappoint or economic shifts occur, growth stocks could correct sharply. 

Schwab’s defensive tilt, including enhanced energy exposure to support AI data centers’ power needs, positions it well for such scenarios. Historical backtests of its benchmark index show outperformance over full cycles, including bubbles and crashes, despite lagging in euphoric bull markets. 

In the past two months, as doubts about AI’s sustainability have grown, the ETF has matched the S&P 500’s performance and is trading above it over the past month as those worries deepened.

Key Takeaway

Schwab U.S. Dividend Equity ETF suits those seeking steady income and capital preservation rather than maximum growth. Its yield provides tangible returns regardless of price swings, and low costs enhance efficiency.

In a prolonged AI bull market, the ETF may continue trailing, but abandoning it ignores cycle dynamics. Many experts view it as a hedge against overexuberance, recommending it alongside growth allocations for balance.

Schwab is far from doomed. It is purposefully designed for reliability across market cycles. In the AI era’s speculative environment, its focus on quality dividends offers diversification and protection. Investors chasing short-term AI gains might overlook it, but for long-term portfolios prioritizing income and resilience, 

The ETF remains a core holding in my portfolio, and I recommend sticking with it through periods of underperformance, as history shows dividend strategies often outshine when growth falters.