Is It Finally Time to Cheat on SCHD? Its Best Year Just Made It a Worse Deal
SCHD just had one of its best years ever, and that success may have quietly turned it into a trap for income investors. Before you keep buying, consider what the rally actually cost you.
The Schwab US Dividend Equity ETF (NYSEARCA:SCHD) remains the go-to ETF option for many income investors, especially as it redeemed itself in the past year. However, its performance has unfortunately eroded the appeal that made it a great option in the first place.
SCHD’s dividend yield is now 3.2%, whereas the dividend yield was 3.8% one year ago. The stock price has grown 21.9% year-to-date, though it is down around 6% from its peak, and the momentum seems to be normalizing.
One year ago, an income investor saw an ETF with significant upside potential, a juicy, growing dividend yield, plus low fees. Today, the biggest and perhaps only positive for SCHD is the low fees. I wouldn’t expect the ETF to pull off another solid year as Treasury yields skyrocket, nor would I expect dividends to grow significantly.
Thus, it’s a good idea to look at some alternatives.
What SCHD used to offer and where to find it now
If you want an actual ETF that holds dividend stocks (not tech stocks with an options overlay), gets you a dividend yield around 4%, low fees, plus high upside potential, there are a few candidates that are worth looking at.
The State Street SPDR Portfolio S&P 500 High Dividend ETF (NYSEARCA:SPYD) is what I would look at as a first option, since it did not have the rally that SCHD did and remains depressed with good upside potential.
You’re getting a dividend yield of ~4.4%, with a low fee. SPYD can spring back as SCHD did, but for that to happen, both the real estate and financials sectors would have to pop. SPYD’s biggest holdings lie there, whereas SCHD’s largest holdings are in healthcare and consumer defensive.
Alternatively, you can buy the Invesco S&P 500 High Dividend Low Volatility ETF (NYSEARCA:SPHD). It pays dividends monthly and has a 5.12% dividend yield with an expense ratio of 0.3%, or $30 per $10,000. It also has solid upside potential, though the biggest sectors are real estate and financial services stocks.
Buy what’s killing SCHD
You won’t get the old SCHD back with 10-year Treasury yields at 5.24% and the 1-year at 4.45%. Investors are much more comfortable buying bonds that give you a yield that high instead of chasing a dividend ETF sitting on huge gains with a yield barely above 3%.
I’d only keep putting more money in if I was holding and reinvesting SCHD before it went up. Otherwise, I’d buy Treasuries that are eating its lunch. Treasury ETFs are pulling in billions of dollars because you get paid more than SCHD pays while taking far less risk. If rates do come down, SCHD will still be there, likely at a better yield than today.
You can also dip your toes into foreign dividend stocks, which have quietly been beating SCHD for years. They pay more, they trade at lower valuations than US stocks, and many of them don’t react to U.S. Treasuries soaring higher.
The Franklin International Low Volatility High Dividend Index ETF (BATS:LVHI) is the one I’d look at first. It yields about 4.5% and hedges currency exposure. In the past five years, LVHI is up 116.6% vs. SCHD’s 56.3%.
And if you want even more upside, you can still hit pause on buying dividend stocks and buy tech ETFs before Anthropic’s IPO hits the market. Lots of dividend investors are rotating into tech for gains, though this is the riskiest move.
What should bring you back to SCHD
Treasury yields won’t rise forever and won’t stay high permanently, nor will SCHD trade expensively forever. SCHD has usually paid around 3.5%. To get back there with today’s dividend, the price would need to fall to about $30, about 9%.
I’d start being comfortable with buying SCHD at that price range. And if SCHD keeps going down, it’d be an even better idea to load up more, as it has been a consistent long-term performer, and dips have generally turned into great buying opportunities time and time again.
But until then, I’d let Treasuries do the work.
Contact [email protected] for any questions or corrections.
Omor Ibne Ehsan is a writer at 24/7 Wall St. He is a self-taught investor with a focus on growth, cyclical, and dividend equities that have strong fundamentals, value, and long-term potential. He also has an interest in high-risk, high-reward investments such as penny stocks.
