Is SCHD Losing Its Shine? - Weaknesses Every Investor Should Know

Previously, I introduced the Schwab U.S. Dividend Equity ETF (SCHD) as one of the best dividend income funds for retirement and compared its performance to JEPI in my post on income strategies. Today, I will take a critical look at SCHD and share insights on potential ways to enhance your dividend income strategy.

What?

The Schwab U.S. Dividend Equity ETF (SCHD) has long been considered a gold standard among dividend-focused funds, attracting a loyal following of investors seeking consistent income, low costs, and broad diversification. Since its inception, SCHD has delivered impressive long-term performance, combining high dividend yields with growth potential.

The chart below from Morningstar compares the growth of a $10,000 investment in SCHD (blue line) versus its benchmark index (red line) and category average (yellow line) over the past decade, as of Nov 29, 2024. SCHD has consistently outperformed both its category and benchmark, illustrating its strong historical performance. This outstanding track record has earned SCHD Morningstar’s coveted 5-star rating, making it a trusted choice for many dividend-focused investors.

So What?

Despite its strong historical performance and 5-star rating, SCHD is facing challenges that could affect its future appeal. Key concerns include:

• Reduced Growth Potential: Recent portfolio rebalancing has decreased SCHD’s exposure to high-growth sectors like technology, leading to slower projected earnings and dividend growth compared to its historical averages.

• Rigidity in Strategy: SCHD’s rules-based approach limits its flexibility, potentially causing it to miss opportunities in rapidly evolving or undervalued sectors.

• Lack of REIT Exposure: While SCHD remains a well-diversified fund, its complete lack of real estate investment trusts (REITs)—a common hedge against inflation and interest rate changes—has been highlighted as its Achilles’ heel.

• Slowing Income Growth: SCHD’s income growth potential has dropped from 13%-14% annually to just 8%-9%, raising questions about its ability to maintain its dividend-focused edge.

For long-term investors, these issues suggest that SCHD might struggle to replicate its past success in a changing market environment. While it remains a solid option, these weaknesses should prompt careful consideration.

Now What?

For investors who currently hold SCHD or are considering adding it to their portfolio, it’s essential to evaluate whether it still aligns with your financial goals and risk tolerance given the challenges discussed. Here are a few actionable steps to consider:

• Review Your Portfolio Goals: Assess whether SCHD’s slower growth and lack of REIT exposure fit your income and diversification needs, especially in today’s shifting economic environment.

• Monitor Performance and Rebalancing: Keep an eye on SCHD’s future rebalancing and sector allocations to ensure it remains aligned with your investment objectives.

• Diversify Strategically: If SCHD is a significant portion of your portfolio, consider complementing it with other ETFs or investments that address its limitations, such as those with exposure to REITs or high-growth sectors.

Stay tuned for my next blog post, where I’ll explore potential alternatives to SCHD that can enhance your portfolio’s growth, income, and diversification strategies. These options may offer a more balanced approach for investors seeking to address the weaknesses outlined here.

Concluding Remarks

SCHD has earned its place as a top choice for dividend-focused investors, but no investment is without its flaws. As market conditions evolve, understanding SCHD’s limitations—such as slower growth and lack of REIT exposure—becomes crucial for making informed decisions. While it remains a solid fund, addressing these weaknesses could lead to better outcomes for your portfolio. In my next post, I’ll introduce potential alternatives to SCHD that may help fill these gaps and meet your long-term investment goals.