Quick Learning
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The Schwab US Dividend Equity ETF (SCHD) holds 105 stocks but concentrates 42% of assets in the top ten positions, including Texas Instruments (TXN), UnitedHealth (UNH), and Qualcomm (QCOM), all of which meet quality screens but create exposure to pharma patent cliffs and power cycles that can’t differentiate the fund.
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SCHD has beaten the S&P 500 by 12 percent year to date but trailed the SPY by 39 percent over five years, making it a quality-tested income vehicle better suited as part of a diversified portfolio than a stand-alone dividend.
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Most investors are buying Schwab US Dividend Equity ETF (NYSEARCA:SCHD) because the fund’s reputation tells them they are buying diversification. SCHD has 105 stocks, heavy screens on dividend quality, and charges 0.06%.
A retiree who builds an income portfolio in SCHD usually hasn’t read the stock list. Read the list and the story of diversity bends: the top ten positions occupy ~42% of the fund.
What SCHD does
The fund tracks the Dow Jones US Dividend 100 Index, which evaluates US companies by ten-year dividend history, cash flow to total debt, return on equity, dividend yield, and five-year earnings growth. It reconsolidates every March and balances quarterly. SCHD is therefore a basket of quality equities built around mature businesses that pay regular dividends qualified by operating cash flows.
The screen does its job at the security level. The top handle includes Texas Instruments (NASDAQ:TXN), UnitedHealth (NYSE:UNH), and Qualcomm (NASDAQ:QCOM). Each word goes through a quality filter. Integration is what the brochure does not advertise.
Does it deliver?
This year, yes. SCHD is up 21% year-to-date versus 9% for the S&P 500, helped by the strength of real activity. Crude went from $60 in January to $90 today, too Chevron (NYSE:CVX) rode that to a 47% one-year gain. Extend the window and the image changes. Over five years SCHD returned 53% in value compared to 92% for SPY.
The tradeoffs are the fact sheet plays a bit
Three focuses are worth pricing before you treat SCHD as a diversifier.
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Pharmacy collection. Many of SCHD’s pharma holding companies are walking between proprietary cliffs. Humira biosimilars are chewable This is AbbVie’s site (NYSE:ABBV) Humira sales were $688 million last quarter, down 39% year over year. Revlimid loses US exclusivity in November 2026. JANUVIA is already down 28% from generic pressure. Screen awards for their share histories. Cannot see patent calendar.
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The power grab goes with the same oil barrel. When WTI fell to $58 last December, both stocks took it on the chin. A simultaneous 30% withdrawal from these two will go directly into the 8% fund before the other book has a vote. We may be close to an Iran deal that could lower energy stocks again.
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The filter did not prevent profit cuts. Most stocks here are not immune to dividend cuts, and that’s why SCHD took so long to come back. It went on for 4 years where it didn’t return anything and investors started fleeing elsewhere. But again, SCHD is back to being very fit after recovery.
How does SCHD compare to the simpler alternative?
I Company Vanguard High Dividend Yield ETF (NYSEARCA:VYM) charges 0.04%, holds about 550 stocks, and is overweight. You sacrifice screen quality for SCHD, and historically you give up the value back. In exchange, VYM’s top ten rarely exceed 25% of assets. For the retiree who chose SCHD because they want diversity, VYM is the version that delivers.
You should also consider the fact that VYM has outperformed SCHD and is up 72.3%. You can think of it as a middle ground between SCHD and SPY. However, I can warn you that your dividend yield here is low in percentage, with negative income growth. Not only that, SPY is up 20.7% so far this year, while VYM is up 11.23% this year. Over 10 years, SCHD is up 245% compared to VYM’s 212%, so there’s a good chance that VYM’s performance over the past 5 years was a fluke.
So, should you buy SCHD?
SCHD remains one of the cleanest budget products on the shelf: cheap, budget-friendly, and built around businesses that have been paying for a decade. It is part of the income of an investor who understands that they are buying ten single stock bets dressed up in an index fund.
If you can’t stomach the pharma patent cliff and power cycles that are part of your distribution, consider pairing SCHD with a flat-weighted ETF instead of relying on it as a stand-alone allocator.
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