SCHD is a beloved dividend ETF: 2 reasons I’m not buying

The Schwab US Dividend Equity (SCHD) ETF, one of the most beloved funds by income investors, had a difficult performance in the first half of the year. Its total return – price movement and dividends – rose by just 4% while the SPDR S&P 500 ETF (SPY) rose by over 15.2%.

Still, despite this underperformance, the SCHD ETF saw over $1.6 billion in inflows during the year. It has added assets in all months of the year, bringing its total assets under management to over $54 billion. So, here are a few reasons why I am not buying the SCHD ETF.

SCHD ETF has lagged the S&P 500 and Nasdaq 100 indices

When investing in an ETF, one of the easiest things you want to consider is whether it provides an edge against other popular funds like those that track the S&P 500 index. Ideally, I prefer investing in funds that provide better performance than these indices.

While the Schwab US Dividend ETF is a popular fund, it has a long track record of underperforming the S&P 500 and Nasdaq 100 indices. For example, in the past five years, the SPY ETF has had a total return of 100% while the SCHD has risen by 74%. 

In the same period, the Invesco QQQ (QQQ) and the Technology Select Sector SPDR Fund (XLK) have risen by 165% and 204%. 

The same has happened when you consider annualised returns of the SCHD, SPY, and QQQ. A look at the annual returns, we see that the SCHD’s best year was in 2013 when it generated 32.89%. The next one was in 2021 when it rose by 29.8% followed by 2019 when it rose by 27%.

On the other hand, SPY’s best year was in 2013 when its performance matched SCHD’s gains. It has then outperformed the SCHD in all years since then.

Therefore, while the SCHD has a higher dividend yield of 3.64% compared to SPY’s 1.26%, its total return has not been all that good.

The weaker returns have happened because the fund has limited technology companies. It is mostly made up of companies in the financials, health care, consumer defensive, and industrials. 

SCHD ETF vs QQQ vs SPY

There are better income-focused assets

The other reason why I am not buying the SCHD ETF is that there are better alternatives for dividend-focused investors. 

As you probably know, most investors buy the fund because of its track record of paying a dividend yield than most ETFs. They also buy it because of its record of dividend growth, which have grown by 7% in the past three years. 

However, data shows that there are better alternatives if you are interested in dividends. For example, last week, I wrote about the ClearBridge Energy Midstream Opportunity Fund (EMO) has beaten the S&P 500 index this year while having a dividend yield of 6.40%.

If you are interested in a high dividend yield income, there are companies like midstream and Real Estate Investment Trusts (REIT) that pay a higher return than the SCHD. 

MLPs like Energy Transfer and Enterprise Product Partners also have better tax advantages than the SCHD fund. 

The bottom line

The SCHD, as I have written before, has been a good ETF in the past decade as its average annual return since inception has been about 12.9%. That performance has been a bit weaker than the SPY’s annual return of about 13.1% in the past decade. 

However, while the fund has a higher dividend yield and a strong growth rate, I believe that investing in other generic funds like SPY, XLK, and QQQ is a better way to allocate money when you consider the total return.

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