SCHD Analyst Calls Passive Dividend Investing Dead – Reality Check

A Seeking Alpha analyst downgraded the Schwab US Dividend Equity ETF (SCHD) this week and declared that passive dividend investing has run its course. The analyst, who had previously rated the fund as a buy, cut the rating and argued the strategy is dead.

The case focuses on a narrowing yield advantage and persistent underperformance against the S&P 500. Concentration risk in financials and healthcare also draws criticism. SCHD's top holdings, JPMorgan and Merck, have lagged the market's tech leaders.

The numbers support part of the story. Performance data shows SCHD's price return trailing the S&P 500 by a wide margin over the last half-decade. Including dividends closes some of the gap but does not erase it. The fund's yield now sits near 3.5%, not far from the effective yield of the S&P 500 when stock buybacks are factored in.

Is passive dividend investing truly dead? Some market observers argue dividend-focused funds follow a cyclical pattern. They tend to lag when growth stocks lead and reassert themselves during downturns or value rotations. In a broader stock market analysis of factor performance, value and quality have lagged growth for two consecutive years. A reversal in that trend would benefit SCHD.

For current holders, the downgrade forces a practical question. Does the ETF still meet its goal? For income generation, the answer is yes. The fund pays a 3.5% dividend with a 0.06% expense ratio. For total return, the case is weaker. The analyst's warning may lead to further outflows. The fund's liquidity and low costs limit the damage, however.

SCHD's next ex-dividend date is expected in late March. The fund has increased its dividend every year since 2011.