Avoid Nightmares With SCHD (NYSEARCA:SCHD)

In this column, we provide a quarterly update on the Schwab U.S. Dividend Equity ETF™ (NYSEARCA:SCHD). This is an exchange-traded fund, or ETF, and it is not at all exciting or sexy in any way but is regularly rebalanced to track very closely the Dow Jones 100 Dividend Index. This is one ETF that, we think, is great for the long-term conservative investor, particularly those in the back half of their investing horizons, but is appropriate for all investors. It should not be the only ETF you own, but can be mixed in with other ETFs and dividend growth stocks to have a strong long-term portfolio to grow your wealth.

Yes, this is not a get-rich-quick name, and won’t make a killing in the short run. At our service, we do offer short and medium-term trades. The goal is to use the proceeds to feed a long-term portfolio, but for those shy to join, our suggestion is to at least have a diversified long-term port, and SCHD does have a place. You likely won’t lose your shirt in this ETF, barring a market collapse/severe correction, in which case, everyone will lose money on paper who is long equities. That is a fact.

Surprisingly, this ETF still garners a lot of controversy. We suppose the argument that it underperforms other assets is legitimate, but we argue that this ETF does a fantastic job as it was designed to be relatively stable while tracking the aforementioned index. Bottom line? This is a conservative investment, and you will sleep well at night owning it. You will never wake up and see it down 10% or more like you can with single stocks… While it offers a growing dividend over time, those who chase yield at all costs, which is an awful strategy without serious research, will not like this ETF. Thus, if rapid high growth or super high yield is your game, then SCHD is not for you.

This ETF will help you avoid nightmares, but you will not be out there buying yachts, either. What it does offer is stable and reliable dividend growth and capital appreciation over time. In this column, we will check the portfolio and provide insights into the ETF and the holdings, which recently underwent another rebalancing a few months ago.

The holdings of Schwab U.S. Dividend Equity ETF

The Schwab U.S. Dividend Equity ETF is still invested in a total of 103 diversified holdings across a range of sectors. Here are the current top 10 holdings of The Schwab U.S. Dividend Equity ETF, as of Thursday, September 12, 2024:

In this column, we will hone in on the 5 holdings. So, as we see here, 21.63% of the ETF is invested in these top 5 holdings, while the top 10 holdings constitute 41.52% of the ETF at this time. While that can be a slight concentration risk, keep in mind that these are high-quality, blue-chip stocks in the ETF, and are diversified. And really, compared to some other ETFs, 4.59% as a top holding really is not all that concentrated. The overall holdings are certainly diversified by sector:

Since the ETF seeks to mimic, before fees and expenses, the total return of the Dow Jones US Dividend 100 Index (DJUSDIV), you can look there and predict what SCHD will hold. The financials sector is the highest percentage of the overall portfolio at 17.95% of the ETF. Then it is followed by healthcare at 16.26%. Consumer defensive is the 3rd highest concentration at 14.92%. Industrials and energy round out the top five at 11.93%, and 11.34%, respectively. Since over 20% of the ETF is weighted in five stocks, the action in trading in the ETF is influenced substantially by the top 5 major holdings and how they trade, so let us take a look at them.

Lockheed Martin

Lockheed Martin Corporation (LMT) is a defense and global aerospace company. Known for its innovative technologies and products, it specializes in Aircraft, spacecraft, and related systems like helicopters. It also makes missile systems and defense technologies. It also has specialized systems for military and space exploration and technology. The risk to LMT is that it depends heavily on government spend, so a possible government shutdown later this month is a near-term risk. Something to be aware of. Long-term, the stock has had a nice run over the last ten years.

The stock has surged in 2024 to new highs. While there have been times of challenges where the stock falls, over time this has been a stable grower. This is a very blue-chip investment, providing great returns. Further, it has had strong dividend growth. Take a look at the history of dividends in the last decade:

This dividend growth grade boasts a solid “A-” rated dividend growth grade.

We continue to expect ongoing dividend growth. While some metrics like EBITDA growth and free cash flow growth per share are on the softer side currently, the company has strong revenue and earnings growth. It is a stable blue chip.

AbbVie

The second-highest weighting is one of our top picks in the biotech space: AbbVie Inc. (ABBV). AbbVie has been a BAD BEAT Investing pick for years, since the stock was in the $70s. We have been running a house position for years, collecting all future growth and dividends in this name. Here we have another history of strong growth and dividend growth as well. The last ten years have seen substantial returns.

So here we see impressive gains in the past ten years, though 2018-2020 was a period of weakness, and that is where we were big buyers. This growth has been coupled with impressive dividend growth. Take a look at the ongoing consistent dividend hikes year-after-year.

As we can see above, the dividend has continued to grow, just like all the other holdings we will cover, that is how it gets into the index, and into the ETF. The stock of ABBV also enjoys an “A-” rated dividend growth grade, weighed down some by average EBIT and EBITDA growth as well as current FWD revenue and earnings growth. Some of this has to do with the timing of new products and trials, but over time, we expect an ongoing winning blue chip.

Overall, ABBV has an impressive portfolio of products and more are in the pipeline. We rate this stock a long-term buy, and it is a quality holding in the SCHD ETF.

The Home Depot

The Home Depot, Inc. (HD) is one of our longest and oldest holdings. The company has for the most part consistently grown, despite questionable periods for housing and home improvement. The company was under and is under some pressure a bit from the high interest rate environment in the last few quarters, but this is short-term. Home Depot is one of the best-run companies in the world. And while we have seen the stock give back gains during periods of weak housing and weak consumer spend, a lower rate environment is likely to spur the next leg of growth. Long-term, this continues to be a big winner.

And like the other holdings we have seen, the dividend growth history is solid. You can expect annual dividend hikes as we move forward.

As you can see, the dividend has quadrupled in the past 10 years. That is certainly impressive. And we see a strong dividend growth grade.

As you can see, Home Depot boasts an impressive “A+” rated dividend growth grade. Revenue and earnings growth metrics are about average, but the dividend metrics are all well above average. You can expect ongoing gains and dividend growth with this world-class blue chip.

Coca-Cola

Perhaps one of the most stable and reliable long-term investments one could ever make is in The Coca-Cola Company (KO). This is a dividend king, folks. There is a reason Warren Buffett made this one of his longest-term investments. It is an absolute dividend champion that has offered very slow and stable growth over time. While the capital gains are not impressive year to year, the stable dividend growth has made it a very conservative investment, and a prime example of the type of stock in the SCHD ETF. Take a look at the last ten years.

Now we do see during COVID-19 when restaurants were shut down, and people were afraid to go shopping for a few weeks (or months) the stock tanked, but quickly came back. The stock has made a massive run here in the last few months and is now over $70 per share. But this stock growth comes with dividend growth. In the past ten years, the dividend has been raised 1 to 3 cents quarterly each year.

Now, the total returns in the past ten years may not be as strong as some other holdings in the SCHD ETF, but they are consistent. The dividend growth grade here is also ‘A+’ rated.

As you can see, there are average to above-average metrics in the dividend growth grade. That said, Coca-Cola will continue to be a dominant player in the beverage and snack space. Globally, they are everywhere and enjoy pricing power. While until very recently the stock has grown very slowly, it is reliable.

BlackRock

Rounding out the top 5 is financial behemoth BlackRock, Inc. (BLK). This is a company that has its proverbial fingers in almost every pie. They are major institutional holders in every major stock you can think of. This is one of the largest asset managers in the world. They do investment management, provide ETF offerings, and do advisory services. The stronger the stock market, the better this company performs. The stock appreciated with the market strongly, but took a hit when interest rates started to rise. The stock only recently clawed back to approach trading history highs.

Still, despite the trading since late 2021, long-term the stock has been a multi-bagger in the past ten years. We expect long-term growth, but we also expect ongoing dividend growth.

Like the other holdings, once again, you see sizable dividend growth. BlackRock also enjoys an “A” rated grade for dividend growth.

The company enjoys strong revenue and EBITDA growth here, helping boost the grade. Long-term, do not bet against BlackRock, as they are a behemoth in the financial space.

SCHD Dividend Growth

Because all the top holdings of SCHD, regardless of where the rebalancing places holdings, the dividend growth of the holdings has led to SCHD also offering stable and reliable dividend growth. If you invest in SCHD long-term and reinvest the dividends, the compound interest effect will take hold and grow your wealth slowly and safely. Again, own more than just this ETF, but it has its place. Take a look at the last ten years of dividends.

While the quarterly dividend varies, as you can see over time, it has only gone up on average.

Overall take

Now, for the most part, you could purchase these top 5 holdings and have a pretty decent portfolio. Maybe if you owned the top 10, your performance would mimic SCHD largely. Now, with ETFs, one could make the argument that you also have to own the bad stocks along with the good, but the impact of a bad-performing stock will be offset by those continuing to deliver.

Of course, a market-wide selloff will take SCHD down. That is obvious. But for conservative growth long-term, as well as dividend growth and compounding through reinvestment, conservative investors should strongly consider this ETF. It is boring. And boring is not bad. It is a stable ETF. Stable is not bad. If you are an income-thirsty investor, you can get a much better yield elsewhere. If you want shorter-term rapid gains, that is why we offer a service. You can also get much better growth elsewhere long term. However, you will avoid nightmares with this ETF. There aren’t too many stress-free ETFs, but this is pretty close.

Buying Schwab U.S. Dividend Equity ETF™ on market dips is a good strategy for slowly growing income, and growing your capital over time. Critics of the ETF can voice their thoughts below, but with a paltry 0.06% expense ratio, you just cannot deny that SCHD does its job of tracking its linked index quite well. We think you look for market dips, and add to it. Sleep well at night, folks.