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

As investors look beyond domestic borders to diversify their portfolios, international dividend ETFs have become increasingly attractive. One such option is SCHY, the Schwab International Dividend Equity ETF. Designed to tap into international markets with a focus on dividend-paying companies, SCHY offers a unique opportunity for those seeking income and diversification. In this blog post, we will explore what SCHY is, its advantages and disadvantages, and effective strategies for investing in this international dividend ETF.

What is SCHY?

SCHY stands for Schwab International Dividend Equity ETF. This ETF aims to deliver high dividend income by investing in a diversified portfolio of non-U.S. stocks. Like its U.S. counterpart SCHD, SCHY focuses on companies that consistently pay and increase their dividends over time.

SCHY tracks the Dow Jones International Dividend 100 Index, which filters global companies based on specific criteria to ensure quality and sustainability in their dividend payouts.

Key Features of SCHY

• Companies with at least ten consecutive years of dividend payments
• Non-U.S. companies across both developed and emerging markets
• Focus on companies with strong financial stability and consistent dividend growth

After selecting qualifying stocks, the top 100 companies are chosen based on four financial metrics: return on equity, dividend yield, dividend growth rate, and payout ratio.

SCHY Composition

The ETF includes a wide range of sectors, from consumer staples and healthcare to energy and financials. Some notable holdings in SCHY include AstraZeneca (AZN), Nestle (NSRGY), and Unilever (UL). The focus is on well-established, financially stable companies with a strong history of dividend payments.

Pros of SCHY

Geographic Diversification

One significant advantage of SCHY is its global diversification. By investing in international markets, investors can reduce their reliance on the U.S. economy and spread risk more effectively. This diversification is crucial for balancing out the cyclical nature of different economies, providing a more stable investment experience.

Strong Dividend Growth

SCHY focuses on companies that have a solid history of paying and increasing dividends, which can provide a reliable source of income. With the global scope of investments, SCHY offers exposure to growing dividend streams in various international markets, including both developed and emerging economies.

Low Expense Ratio

The expense ratio of SCHY is 0.14%, which is relatively low for an international ETF. Lower fees contribute to higher net returns over time, particularly important for long-term investors focusing on dividend reinvestment.

Cons of SCHY

Currency Risk

One drawback of investing in international ETFs like SCHY is exposure to currency risk. Exchange rate fluctuations can impact your returns, adding an additional layer of volatility. While geographic diversification can mitigate some risks, currency fluctuations remain an uncontrollable factor.

Tax Complexity

Investing in international dividend-paying stocks can create more complex tax situations. Dividends from foreign companies may be subject to withholding taxes by the host countries, and navigating the tax implications can be challenging. It's crucial to consult with a tax professional to understand the implications.

Volatility in International Markets

While international diversification can provide stability, some markets may be more volatile than the U.S. market. Political instability, economic uncertainties, and varying regulatory environments can lead to more frequent or severe market swings.

SCHY Investment Strategies

Long-term Investment

Given SCHY's focus on dividend growth and its low expense ratio, it is well-suited for long-term investors. A holding period of at least ten years can help mitigate the short-term volatility associated with international markets, allowing you to benefit from the compounding effect of reinvested dividends.

Diversification Strategy

SCHY can serve as an excellent diversification tool within an existing portfolio. Combining it with a domestic dividend growth ETF like SCHD can create a balanced portfolio that captures both U.S. and global growth opportunities.

Dividend Reinvestment

Maximizing the compounding effect through dividend reinvestment is a powerful strategy with SCHY. By automatically reinvesting the dividends, you can enhance your long-term gains significantly. This strategy capitalizes on the consistent and growing dividend stream from the underlying international companies.

Conclusion

SCHY represents an ideal option for those looking to diversify their dividend income sources on an international scale. With its focus on companies that consistently pay and increase dividends, SCHY provides a stable and growing income stream. However, potential investors must consider the complexities of currency risk and tax implications.

For long-term, diversification-focused investors, SCHY offers a compelling addition to a well-rounded portfolio, enabling them to gain exposure to the growth potential of global markets while benefiting from consistent income through dividends. Whether you are preparing for retirement or building a robust investment portfolio, SCHY's advantages outweigh its challenges, making it a wise choice for global dividend investing.