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The combination of dividends and low fund fees is unlikely to ever go out of style with clients and with inflation lingering as a major concern for many clients, that combination is all the more alluring.
Clients’ partiality to low fund fees is self-explanatory. The less long-term investors pay each year to fund issuers, the more money they keep for themselves and that capital likely compounds over time, thus enhancing outcomes.
As for dividends, payouts are obviously pivotal in the compounding equation. Dividends are also credible inflation-beaters in their own right. One segment that has proven its mettle in the face of persistent inflation is dividend growth. That makes sense because prior to the bout with inflation that started in 2022, S&P 500 payout growth spent decades matching or beating (mostly the latter) inflation.
Point is the marriage of dividends and low fees is a match made in investing heaven and it’s one that few, if any clients, are opposed to. In part, that explains the success the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD).
SCHD: A Schwab Success Story
SCHD debuted in October 2011, meaning there are a fair amount of dividend ETFs out there that are older, but as is the case with some many Schwab ETFs, SCHD is an undisputed success. Nearly $54 billion in assets under management confirms as much.
The annual fee of 0.06%, or $6 on a $10,000 investment, supports that success as does an index methodology that focuses on reliable payout growers.
“The Dow Jones U.S. Dividend 100 Index underpinning this fund admits 100 stocks that have paid dividends for at least 10 consecutive years and boast the financial health to extend that streak,” notes Morningstar’s Ryan Jackson. “Industry fixtures like Coca-Cola KO and Home Depot HD meet those requirements and sit atop the portfolio. Dividend-oriented firms with healthy balance sheets tend to be more insulated from market movements than highflyers or low-quality competitors, so this fund normally strikes a defensive stance.”
The mandate of SCHD’s underlying index, in part, leads to the ETF being a large-cap value play. The subsequent risk is that due to technology dividends being a relatively new phenomenon, many tech dividend payers haven’t been in the payout game long enough to gain entry into SCHD. As a result, the fund’s weight to that sector is just 9.1%.
Conversely, nearly a third of SCHD’s 103 holdings hail from the significantly less glamorous financial services and healthcare sectors.
SCHD Has Chops
Due to the aforementioned sector composition, SCHD is best viewed through a long-term lens. So while SCHD isn’t going to turn clients into millionaires overnight, it does capture more of the Russell 1000 Value Index’s upside (90%) than it does downside (87%), as Jackson notes.
In other words, quality meets low volatility in the Schwab ETF and for many clients, that’s an appealing recipe.
“That combination helped its Sharpe ratio (a measure of risk-adjusted performance) rank within the top decile of large-value peers from its October 2011 inception through February 2024. And despite recent difficulties, its total returns have measured up well, too: It beat the Russell 1000 Value Index by about 1.6 percentage points annualized over the same span,” concludes Jackson.
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