ETF US Market

Why I Just Added The Schwab US Dividend Equity ETF $SCHD To The Portfolio

Calvin Lo

I have just added the Schwab US Dividend Equity ETF (ticker SCHD) to our Family Portfolio as a brand new core holding. I bought a starter position, with the intention to gradually increase my position in the coming weeks.

SCHD is a very popular dividend ETF, but is also not particularly cheap and has not sold off as much as the rest of the market. However, that was also precisely one of the main reasons I wanted it in the portfolio. SCHD is still down 11.1% YTD but still much less than VOO or VT which are down 19.7% and 20.9% respectively.

Overview of SCHD

SCHD aims to track the total return of the Dow Jones US Dividend 100 Index. The index focuses on the quality and sustainability of dividends. Stocks selected for the index are selected for fundamental strength relative to peers based on financial ratios.

SCHD is a passive ETF with low expense ratio of 0.06% and low portfolio turnover of 13.56%. Total new assets is an impressive $34.6B. Distribution yield (TTM) is 2.88%.

The fund has 104 holdings. The top 10 are well-known household names, at least in the US.

Source: Schwab Asset Management

Digging into the index methodology, stocks are screened 10 consecutive years of dividend payments, minimum float-adjusted market cap (FMC) of US$500m, and 3-month avg daily traded volume (ADVT).

Stocks that pass the screen are then ranked according to 4 fundamental-based characteristics, namely FCF/debt, ROE, dividend yield, and 5Y dividend growth rate. The 100 top-ranked stocks are then chosen to be included into the index.

You can find out more on the index methodology here.

With that brief description of SCHD, here are my reasons for adding SCHD into the portfolio:

Diversification

With rising inflation, interest rate hikes, and the spectre of recession looming, the consensus in the market seems to be to focus on quality and/or dividend-paying stocks. SCHD fits the bill by screening for 10 years of consecutive dividend payments and favours companies with more FCF, less debt, higher ROE, dividend yield and dividend growth.

Currently, the ETFs in the Family Portfolio are VT, QQQ, VNQ, ARKK and HST. Each has its role. VT for global coverage, QQQ for US tech, VNQ for real estate, ARKK for growth, HST for Chinese tech. SCHD will play the role of quality/dividend, which I anticipate to do well in the upcoming inflationary/tightening/recessionary environment.

Dividend

Over the past couple of years, I’ve pivoted the Family Portfolio from balanced exposure to a more growth-oriented one. With that, the focus on dividend-paying stocks with strong FCF has waned. Maybe I got a little overexcited with growth stocks.

I’ve sold most of my dividend stocks like AbbVie (ABBV) JPMorgan (JPM), Walgreens (WBA) and all my Singapore non-REIT stocks like SingTel (Z74), ComfortDelgro (C52) and ST Engineering (S63). As a result, the portfolio overall dividend yield has dropped significantly since more growth stocks don’t pay a dividend (but hopefully they will in the future).

However, I don’t have the intention to add these stocks back into the portfolio due to the already high number of individual stocks and REITs I’m holding (10 US stocks, 4 SG stocks/REITs). SCHD will provide me a passive and diversified way to get back into dividend plays. The stocks in SCHD are boring and unsexy but are well-oiled cashflow generating machines.

One issue though as a US foreign investor is that dividends (or distributions) paid out by SCHD will be taxed at 30% withholding tax. That’s indeed painful over the long run. Ideally, I’d want to invest in a local dividend ETF to avoid this tax but I’ve not found a compelling one so far outside of S-REITs (I’m already investing in Syfe REIT+ by the way).

SCHD vs STI ETF

I did a quick comparison with STI ETF, since that might be preferred due to similar dividend yield but avoiding the tax. However, I found that total return for STI ETFs (ES3 and G3B) fall far behind SCHD over a 5-10 year period. I’ve also compared them against VOO and VTV for good measure. SCHD performance actually looks really solid and I hope it continues to perform well.

Here are the stats I’ve compiled from various websites. Usual disclaimer that historical performance is not a guarantee of future performance. These are annualised total return figures (including reinvested dividends).

ETF3m6m1y3y5y10ySince inception
SCHD2.61%N.A.5.23%20.32%15.11%14.76%14.75%
VOO-16.11%N.A.-10.61%10.59%11.28%12.92%13.29%
VTV-10.27%N.A.-1.85%8.68%9.21%11.77%8.19%
G3B1.46%8.56%5.72%4.57%3.47%N.A.8.42%
ES31.51%8.32%5.66%4.67%3.59%4.73%6.53%

So even with the 30% tax on dividends, SCHD might still be the better investment over the long term. In the short term who knows, Singapore might continue to outperform as it has done recently but I’m not willing to bet on that.

Closing thoughts

If you’re like me and your portfolio is all red (preparing for CNY), you might want to consider tweaking your strategy slightly to adapt to the new economic regime. No one knows what’s going to happen, since reversing this massive QE is unprecedented.

What we can do is focus on our portfolio mix, doing our research, and understanding our investments so that we don’t panic should things turn further south (that’s always a possibility no matter how much the market has fallen).

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Disclaimer: This is not financial advice. I am not professional financial advisor nor do I work in the finance industry. Anything I write here is purely my personal opinion. Please do your own research and due diligence before investing into anything. All investments come with associated risks. Best to consult a financial advisor if you’re still unsure.

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