SCHD ETF had big changes in Q1 but 2 issues persist

on Apr 3, 2024
  • The Schwab US Dividend Equity ETF was reconstituted in Q1.
  • It replaced companies like Broadcom, Blackstone, and Blackstone.
  • Some of the most notable new names in the fund are Hershey, Tapestry, and BMY.

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The Schwab US Dividend Equity (SCHD) ETF stock surged to a record high in the first quarter as American equities jumped. It soared to an all-time high of $80.81, which was over 23% above its lowest level in 2023. So, is this wildly popular ETF a good investment in 2024?

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SCHD has some serious issues

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The biggest SCHD news in the first quarter was its reconstitution which swapped 23 companies. The most notable names that were removed from the fund were Broadcom, Merck, ADP, Blackstone, Williams Sonoma, and Illinois Tool Works.

These removals were notable because they are some of the best-performing companies in Wall Street this year. Broadcom stock has surged because of its huge investments in artificial intelligence and its renewed partnership with Apple.

Williams Sonoma stock also did well after the company published strong returns. WSM was one of the first retailers to embrace a digital-first approach. These investments have paid off as its digital sales account for over 60% of total sales.

Meanwhile, Blackstone stock jumped to a record high as investors moved to alternative investments. It joined other PE companies like Brookfield, KKR, and Apollo Global Management in their spectacular rally.

SCHD replaced these companies with other well-known American companies. The most notable members of the portfolio are Bristol Myers Squibb, Hershey Foods, Tapestry, Dicks Sporting Goods, and CF Industries. 

To be clear. SCHD had to do this reshuffle because it tracks the Dow Jones US Dividend 100 index. This index looks at companies that have paid dividends for a minimum of 10 consecutive years, have a minimum market cap of $500 million, and Average Daily Volume of $2 million. 

Additionally, the index looks at companies with strong free cash flow, return on equity, and a healthy Indicated Average Dividend (IAD) yield. It then ranks these stocks in descending order by the yield.

This criteria has created an ETF that has two primary issues. First, the top ten companies account for about 40% of the total portfolio. Some of these names are the likes of Texas Instrument, Verizon, Lockheed Martin, and Blackrock. 

While these are solid companies, it is always risky when an ETF is all this concentrated. The only positive is that these companies are all in different sectors, which removes the correlation risk.

Second, there are concerns about the technology segment of the SCHD ETF. Information Technology stocks only account for 12.58% of the total fund. The biggest parts are companies in the industrial, financial, and health care. Technology has been the best-performing sector in Wall Street, which explains why it has lagged behind the QQQ and SPY ETFs.

Is the SCHD ETF a good buy?

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SCHD vs S&P 500 vs QQQ vs DIA

SCHD vs S&P 500 vs QQQ vs DIA

SCHD has been one of the best-performing ETFs in the market. It has a dividend yield of about 3.35% and has grown the return for 12 years straight. The yield is lower than the sector median of 2.56%.

SCHD’s five-year CAGR has been 11.80%, which is higher than other comparable ETFs like the Vanguard High Dividend Yield (VYM), iShares Core Dividend Growth (DGRO), and the iShares Core Dividend ETF (HDV).

The ETF has had total returns of 78% in the past five years. In the same period, the S&P 500 index has gained by over 81% while Invesco QQQ (QQQ) and the SPDR Dow Jones ETF (DIA) have jumped by over 149% and 65%, respectively.

Therefore, while the SCHD ETF is a good ETF to buy, I believe that it should form part of a portfolio made of other funds like SPY, MOAT, QQQ, and IBIT.


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