What is SCHD? (Pros, Cons, and Strategies)

If you're worried about the long-term sustainability of Social Security, it's time to consider private retirement savings. In this context, many investors use SCHD as a long-term dividend ETF for retirement preparation, and some even for early retirement. For instance, with consistent investment, you might achieve a monthly dividend income of $2,000 to $3,000 in 10 to 20 years. Today, we'll explore what SCHD is, along with its advantages and disadvantages.

What is SCHD?

SCHD is a popular dividend ETF in the U.S. stock market. SCHD stands for Schwab U.S. Dividend Equity ETF.

SCHD tracks the Dow Jones U.S. Dividend 100 Index, which invests in companies that consistently increase their dividends rather than just those offering high dividends.

Typical dividend ETFs mainly invest in companies that pay high dividends. However, the index that SCHD follows invests in companies that have steadily increased their dividends over time. This strategy, which has shown continuous growth in dividend rates from the past to the present, has made SCHD popular as a retirement stock.

Key Features of SCHD

• Companies with at least 10 consecutive years of dividend payments
• Companies with a market cap of at least $500 million
• Companies with an average daily trading volume of at least $2 million over three months

After selecting the stocks, the top 100 companies are chosen based on four fundamentals: cash flow to debt ratio, return on equity, annual dividend yield, and five-year dividend growth rate.

SCHD Composition

SCHD consists of well-known dividend-paying companies such as Cisco (CSCO), Home Depot (HD), Amgen (AMGN), and Chevron (CVX). It primarily includes companies that have steadily increased their dividends, with a low proportion of non-dividend-paying tech stocks (IT, technology, etc.). In other words, SCHD is composed of large, financially stable companies with high liquidity rather than new venture firms.

Pros of SCHD

Continuous Dividend Growth

When you look at the annualized data for the past 10 years of dividend payments, there has been no reduction in dividends compared to the previous year, showing continuous growth. This is the primary reason for choosing SCHD. Based on the past 10 years of data, investors believe it will continue to grow steadily in the future.

In 2017, the dividend growth rate was the lowest at 7%, but it still maintained positive growth, and SCHD's annual average dividend growth rate is a high 12%.

While high-dividend ETFs like QYLD and JEPI are good for short-term dividend investments, SCHD is the most suitable choice for long-term investments of 10 years or more for retirement preparation or early retirement.

Low Expense Ratio

One of the crucial factors in ETF investment is the expense ratio. The expense ratio is the fee paid to the brokerage firm or asset management company for ETF investment, which is paid annually. SCHD's expense ratio is relatively low at 0.06% per year.

A low expense ratio is especially important in long-term investments. Since it is paid annually, it plays a significant role in reducing investment costs and increasing net returns over the long term.

Stable Stock Price

SCHD is an ETF that focuses on dividends rather than capital gains from stock price appreciation, offering a stable stock price flow as a significant advantage. General ETFs with high stock price growth tend to have high declines as well, making it challenging to endure downturns. However, SCHD has a lower proportion of tech stocks, which have large price fluctuations, resulting in relatively low volatility. This provides a stable investment environment for investors.

Cons of SCHD

Low Dividend Yield

SCHD's dividend yield remains at 3 to 3.5%, which is relatively low for a dividend ETF. For example, JEPI shows a dividend yield exceeding 7%.

Unsuitable for Short-term Investors

It is not suitable for short-term investors aiming for 2 to 3 years or 5 years. Significant returns can be expected through the compound effect of dividend reinvestment when investing consistently for at least 10 years. Other strategies or ETFs may be more suitable for short-term profit-seeking investors.

SCHD Investment Strategies

SCHD is not suitable for investors looking for short-term stock growth due to its low proportion of tech stocks with high price growth. Despite this, SCHD remains popular due to its various advantages as a dividend ETF, particularly its stable dividend income, making it suitable for long-term investments.

Long-term Investment Strategy

To invest in SCHD, a long-term investment of at least 10 years is necessary. SCHD features stable dividend growth and steady stock price appreciation, despite having a relatively lower dividend yield compared to other dividend ETFs. If you plan to invest for less than 10 years, consider other high-dividend ETFs instead.

With a plan to invest for more than 10 years, SCHD is one of the best options for retirement preparation. SCHD follows the market's average growth trend and invests in companies that consistently increase their dividends, so the scale of dividend payments will also grow over time.

Maximizing the Compound Effect

By regularly investing a certain amount in SCHD and reinvesting the dividends, you can rapidly grow your assets through the compound effect. This strategy generates stable returns, making it a suitable investment for retirement preparations.