Looking for good dividend stocks can be difficult if you don't have the time or the patience to find the best deals. Dividend Growth ETFs have been coming out to help retail investors make investing in dividend stocks much more effortless. SCHD is the best dividend growth ETF out there.
What makes SCHD such a good ETF for those dividend investors? First, it has an excellent yield that outshines most of the other dividend ETFs on the market. Secondly, it outperforms most of the additional dividend ETFs out there as well. You get an excellent yield with a pretty good overall performance. It is like a win-win scenario.
In this post, let us look at SCHD and see five reasons why SCHD is the Best Dividend Growth ETF out there.
What Are ETFs And Dividend ETFs
Before we get started, let's quickly explain what an ETF is and why they are so great for your portfolio.
An ETF is an exchange-traded fund, which means it is like a mutual fund, but traded as a stock when the market is open.
Generally, when looking for ETFs or good funds, the best ones are low-cost and follow an index like an index fund. There can be high-cost ETFs that are actively managed that can have one or two good years and then crash and burn like ARKK.
Why Buy Dividend ETFs?
A dividend ETF is an ETF that is comprised of companies that provide dividends. There are several on the market, like VYM or VIG. You can also look at DGRO or SDY. These are examples of different ETFs that track indexes for dividend-paying stocks.
A dividend growth ETF consists of companies increasing their dividends over a more extended period, giving the ETF more growth in their yield.
We want those dividends, but research into the strategies, the yields, and all sorts of information can be time-consuming. That is why ETFs can help make this work more straightforward. As an investor, having the ability to pick one ETF over choosing over a hundred different companies makes things much more straightforward.
What Is SCHD?
SCHD is a growth dividend ETF managed by Schwab. It tracks the Dow Jones U.S. Dividend 100 index, which has 100 different companies that have consistently increased their dividends over ten years and have stability.
SCHD was created in October 2011, with an average dividend growth rate of 12%, with a yield of 3.43%. The annual expense ratio sits at 0.06%, costing the investor $6 for every $10,000 that is invested, making it one of the cheapest ETFs.
SCHD competes with VYM and VIG as one of the best dividend growth ETFs and has been able to beat them with a better yield and overall performance.
5 Reasons Why SCHD is the Best Dividend Growth ETF
1. Strong Growth of the Dividend Yield
The dividend yield of SCHD has been growing at a rate of 12% per year since its inception. That means that every six years, that dividend will double in size. That is good news to those that hold shares of SCHD.
If you compare that dividend growth rate to VIG, another dividend growth ETF, it only grows by 8% per year. The 12% growth rate of the dividend for SCHD makes it an attractive ETF since investors want to see the dividend grow.
The first dividend they paid out was $0.122; in 2022, they paid out $2.56 per share. SCHD is predicted to grow its dividends by around 10% per year. Continued growth allows investors to buy more shares by reinvesting their dividends.
2. Strong Overall Performance Compared to The S&P 500
The S&P 500 consists of the 500 largest companies in the U.S. It has been considered a bench market for funds to compare against. When looking for a good ETF for the S&P 500, you can look at either SPY or VOO.
VOO was an ETF that came out in late 2010. SCHD came out about a year later. As you compare the two on their performances since they were launched, you will see that one is winning. If you were to invest $10,000 in SCHD and VOO on October 21, 2011, SCHD would have increased by 318.97%, and VOO would have increased by 290.05%.
As you can see, over the long haul, SCHD has outperformed the S&P 500. That comes down to a few different factors.
SCHD is not as tech-heavy as the S&P 500. Their top stocks are from companies that have grown dividends over ten years. Many tech companies like Google and Amazon do not pay dividends to their shareholders. They use their profits to reinvest in their company. SCHD is composed of mainly value companies that are not growth stocks. It gives the fund more stability.
Market cap does not determine the weight of the SCHD portfolio. Each stock can have a more than 4% allocation in the SCHD portfolio. The portfolio is rebalanced to make sure that no stock is overweight. The S&P 500 is determined by the market cap of a company. So Apple (AAPL) or Microsoft may have a more significant allocation than Coke (KO) or Home Depot (HD).
SCHD has a much higher yield that leads to more people wanting to have it as a part of their portfolio and having the fund's price appreciated.
These are all factors in why it is outperforming the S&P 500.
3. The Low Cost of SCHD
Jack Bogle once said, “In investing, you get what you don't pay for. Costs matter. So intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course.”
SCHD has a low-cost expense ratio of 0.06%, which makes it cheap to hold long-term. As the market goes down, the costs are not eating up your investments.
ETFs, like SDY, have a much higher expense ratio. SDY has an expense ratio of 0.35%, costing an investor $35 for every $10,000 invested. That is an additional $29 that cannot be invested compared to SCHD.
Costs matter when you invest—the lower the costs, the more money can be made or put into the market. SCHD has a low cost, which is favorable to many retail investors who like to invest with them.
4. The Low Volatility of SCHD
Looking for stability in funds is something that investors would like to have. With markets going up and down, that volatility can make investors nervous. As tech ETFs like VGT and QQQ continue to see up and down volatility this year and throughout the years, having some stability can put your mind at ease.
SCHD provides an investor with lower volatility compared to some of the other ETFs. VIG has a volatility of 17.80% for 2022, while SCHD has a volatility of 15.28%. They are both growth dividend ETFs, but SCHD is more stable.
If you compare SCHD to the S&P 500 ETF like VOO, you will find VOO has had a volatility of 19.12%, which is much higher than both VIG and SCHD.
SCHD is built on tracking an index that is focused on quality and sustainable dividends. These companies are value companies that will stay stable through the market's ups and downs, making SCHD a more stable security to hold in your portfolio.
5. SCHD Has a Great Yield
Many have thought of not taking dividend ETFs seriously because the yield is not so flashy. SCHD comes out on top with a yield of 3.43%. If you are a dividend investor, you want a piece of this action.
Most of the Dividend Kings have a yield below 3% right now, and even other ETFs are having difficulty competing with SCHD yield.
VYM, a vanguard high dividend ETF, has a yield of 3.04% right now, trailing the 3.43% of SCHD.
Looking at companies like Coke (KO) and Pepsi (PEP) are generally significant, with dividends having a yield of less than 3%.
If you are looking for a great place to get a good yield full of quality dividend-paying companies, then SCHD is an excellent place to put your money.
How to Invest in SCHD
Investing in SCHD can be done in a few different ways. First, you can open an account with Schwab and invest there. If you already have a brokerage account with companies like Fidelity, TD Ameritrade, or Vanguard, you can easily buy the shares there.
Another option is to create an account with M1 Finance. It is simple to use software that makes pies for you, and you can create a slice just for SCHD and have your investments automated.
So there are many ways to start investing. It takes time to go through your account, select the fund, and buy it. Then you can earn great dividends and have a good performance as you build and diversify your portfolio.
SCHD is not a perfect ETF. It does hold many attributes that warrant it being called the best dividend growth ETF. It has an excellent yield that has grown over the past 10-12 years. The overall performance bypasses the S&P 500, and the low costs of the fund are significant as costs do matter when investing. So you cannot go wrong in adding this ETF to your portfolio. There is a lot of upside to it.
I’m Steve. I’m an English Teacher, traveler, and an avid outdoorsman. If you’d like to comment, ask a question, or simply say hi, leave me a message here, on Twitter (@thefrugalexpat1). Many of my posts have been written to help those in their journey to financial independence. I am on my journey, and as I learn more I hope to share more. And as always, thanks for reading The Frugal Expat.