Schwab U.S. Dividend Equity ETF (SCHD) 2024 ETF Review

Charles Schwab is well-known for its robust brokerage platform, but it also boasts a significant lineup of about 30 ETFs (likely more in the near future).

Among these, the Schwab U.S. Dividend Equity ETF (SCHD) stands out with over $65 billion in assets under management, a testament to its popularity, especially considering the market's recent preference for growth stocks. This ETF has also become a favorite among Reddit investors.

But why do investors like SCHD so much? Is the hype warranted? Is a good alternative to the other dividend ETFs out there? Here's my review of how SCHD stacks up in 2024.

SCHD: what I like

First and foremost, the expense ratio of Schwab U.S. Dividend Equity ETF (SCHD) is exceptionally low at 0.06%. This is remarkably competitive, translating to just $6 in annual fees for a $10,000 investment in SCHD.

The ETF follows a robust selection methodology using the Dow Jones U.S. Dividend 100 Index. This process begins by identifying stocks that have maintained at least ten years of consecutive dividend payments.

It then employs a composite screen that evaluates free cash flow to total debt, return on equity, dividend yield, and five-year dividend growth rate.

The top 100 stocks that emerge from this process are then equally weighted to form the index, with quarterly rebalancing and an annual reconstitution.

Practically, this results in a portfolio with multi-factor tilts, significantly exposing it to value (HML), profitability (RMW), and investment (CMA) factors.

Also, if income is your thing, SCHD pays a pretty decent 3.55% 30-day SEC yield as of November 11. Because this ETF excludes REITs, most of that distribution will be qualified dividends too.

SCHD: What I Dislike

While SCHD has many strengths, there are aspects that warrant a critical look. Performance-wise, SCHD has historically lagged behind the SPDR S&P 500 ETF (SPY) since its inception.

This is somewhat expected as SCHD's portfolio leans towards value stocks, whereas SPY encompasses more growth-oriented stocks, particularly from the technology, communications, and consumer discretionary sectors.

Notably, during the bear market of 2022, SCHD briefly outperformed SPY, highlighting its defensive posture during market downturns. However, given its focus on dividend-paying value stocks, it tends to lag in a bull market where growth stocks dominate.

Another concern is SCHD’s relatively high portfolio turnover rate at 28.75%. High turnover can be a drag on performance due to the potential costs associated with frequent trading. Although the ETF's structure minimizes the likelihood of capital gains distributions—a benefit in terms of tax efficiency—the frequent rebalancing may prevent the fund from fully capitalizing on long-term winners.

The annual reconstitution is necessary to maintain the fund's criteria for selecting dividend-paying stocks, but the quarterly rebalancing might not allow sufficient time for investment theses to play out, potentially curtailing larger gains from sustained stock performances.

SCHD: My verdict

SCHD scores an 8.5/10. Its strengths are clear: an attractive low expense ratio of 0.06% and solid multi-factor exposure which makes it a standout in the dividend ETF space. However, I'm not a fan of the limited selection of only 100 stocks and the quarterly rebalancing, which I feel constrains the fund's potential during extended market rallies.

To address SCHD's shortcomings, I recommend a couple of strategic additions. In a tax-advantaged account, pairing SCHD with the Schwab International Dividend Equity ETF (SCHY) can provide broader diversification. SCHY applies a similar strategy to international stocks.

For those with taxable accounts, bolstering SCHD with the Schwab U.S. Large-Cap Growth ETF (SCHG) could be advantageous, especially in a bull market. SCHG not only offers a low expense ratio of 0.04% but also boasts tax efficiency with a 0.35% 30-day SEC yield.