SCHD's 3.5% yield looks attractive. Total return has been flat since 2022. The S&P 500 gained 25% over the same period. The fund's yield-weighting mechanism creates a systematic drag.
The Schwab U.S. Dividend Equity ETF (SCHD) pays a 3.5% yield, more than double the S&P 500's 1.3% and competitive with the 10-year Treasury after tax. Investors who bought the fund three years ago for that income have seen their principal go nowhere. SCHD's total return since the start of 2022 is roughly flat. The S&P 500 returned about 25% over the same stretch.
The gap comes from two structural features. First, the Dow Jones U.S. Dividend 100 index weights stocks by dividend yield after quality screens. That pushes the fund into sectors where yields are high because prices are depressed. Top holdings include Bristol-Myers Squibb and Cisco. Verizon is another large position. Bristol-Myers has lost about 30% from its 2022 high. Verizon has traded sideways for four years. The fund's technology exposure is less than half the S&P 500's.
Second, the index replaces stocks that cut dividends or see their yields fall below a threshold. That means SCHD systematically sells rising stocks and buys falling ones. Each rebalance tends to lock in losses from the names sold. The fund's turnover runs about 20% per year.
The per-share payout has grown. The trailing 12-month distribution rose about 12% over the past year. That compares with 10% in 2023, 15% in 2022, and 18% in 2021. The underlying holdings – Coca-Cola and PepsiCo are examples – are growing dividends more slowly as earnings growth moderates. Home Depot's dividend growth has also slowed.
Some investors treat SCHD as a bond substitute. That logic worked in 2020 and 2021 when the 10-year yielded 1.5% and SCHD paid 3%. Now the 10-year is above 4%. SCHD's premium over Treasuries after tax is about 70 basis points. The fund's holdings are mature companies with slow earnings growth. Their valuations compress when rates stay high.
A better approach for income-focused investors may be to own the broad market and sell covered calls against it, generating yield without the systematic drag. Or to split the allocation: one ETF for income, another for growth.
SCHD will have quarters where it outperforms. A rotation into value and financials would lift its relative returns. Over a full market cycle, the total-return math does not work. The yield looks good. The net result after three years has been zero real return.
Prepared with AlphaScala research tooling and grounded in primary market data: live prices, fundamentals, SEC filings, hedge-fund holdings, and insider activity. Each story is checked against AlphaScala publishing rules before release. Educational coverage, not personalized advice.