Is the 3.2% yielding SCHD ETF a buy as one-year Treasury yields hit 4.06%?

The Schwab US Dividend Equity ETF SCHD has moved sideways in the past few days. It has remained inside the key support and resistance levels of $31.60 and $32.90 since May.

Despite the consolidation, SCHD is having a strong year, with inflows rising by over $13 billion and its assets nearing the $100 billion mark. Its total return this year has been nearly 20%, higher than that of other ETFs. The Vanguard S&P 500 (VOO) has returned 9%, while the Invesco QQQ ETF (QQQ) has returned 16%. 

SCHD in an era of high bond yields

The Schwab US Dividend Equity ETF is one of the most popular income funds in the world. It has an expense ratio of just 0.03%, making it quite affordable to most people. 

Also, the fund has a long history of doing well, with its dividend growth rate having a compounded annual growth rate (CAGR) of 10.2%, higher than the median of all ETFs of 6.3%. 

Now, however, the fund is having to compete with the bond market, with the one-year yield rising to a high of 4.09%, its highest point since August last year. It has jumped from the year-to-date low of 3%. 

Similarly, the two-year yield jumped to 4.206% from the year-to-date low of 3.65%. This increase continued after the recent FOMC minutes showed that some officials expect the bank will hike interest rates later this year. A Polymarket poll shows that odds of a rate hike happening this year have jumped to 52%. 

Therefore, income investors may decide to just buy the higher-yielding government bonds instead of the SCHD. Besides, all factors constant, a $10,000 investment in the SCHD will bring in $320 in gross dividends. For one-year Treasuries, the annual interest income will be $406. 

Why the SCHD ETF is still worth it

Still, there are reasons why the SCHD ETF remains an attractive investment today. For one, investors in U.S. Treasuries primarily earn a fixed yield if they hold the securities to maturity. While that yield is known in advance, the market value of Treasuries can fluctuate before maturity as interest rates change, largely in response to Federal Reserve policy and broader economic conditions.

On the other hand, the SCHD ETF generates more forms of returns. Investors receive a quarterly dividend and benefits from share appreciation.

There are signs that the fund will do well in the coming months, possibly as investors rotate from growth companies to value ones. In addition to being a dividend fund, SCHD is also one of the biggest value ETFs. This is crucial as the biggest constituents of the fund are in the consumer non-durables, health technology, energy minerals, and finance. 

The fund has also become undervalued and has a price-to-earnings (PE) ratio of 19, slightly lower than the S&P 500 Index’s 22. 

SCHD has strong technicals

SCHD chart | Source: TradingView

Technicals also point to a strong rebound in the near term. It has remained above the 50-day and 100-day moving averages, a sign that bulls remain in control.

The fund has formed a cup-and-handle pattern, a common bullish continuation sign. It is now in the handle section of this pattern. 

Therefore, the fund will likely continue rising, potentially to the key resistance at $35. This view will be confirmed if it moves above $32.90.