Why now is a great time to be buying $SCHD
How to get higher yield on your principal invested
I identified SCHD 0.00%↑ as a top dividend pick in my article where I explored The Ideal US Equity ETF Portfolio:
Insights from that article (Published March 29th, 2023):
Performed better than $VYM and $VIG in every period, except the last 1 year
2nd highest total returns in last 3 years
Highest 4 Year average dividend yield amongst all ETFs considered - 3.12% (TTM: 3.71%)
Highest 3 Year dividend growth (CAGR) amongst all ETFs considered - 13.33% (tied with $SPGP)
2nd highest 5 Year dividend growth (CAGR) amongst all ETFs considered (SPGP at 26.52% vs SCHD at 15.56%)
2nd highest consecutive years of dividend growth - 10 Years ($VYM is at 12 years)
Expense Ratio: 0.06%
I also wrote an article about why the recently very popular covered call strategies ETFs like $JEPI, $JEPQ & $QYLD, are hedges and will likely not beat the returns compared to SCHD in a bull market.
In the same article, I covered the concept of Yield on Cost, which is essential to understanding why right now is a great time to be buying SCHD.
Why SCHD could rally from here:
Technically, we are in a new Bull Market, charged by Artificial Intelligence, but Tech is stretched, I think it can still go higher but it cannot take us much further, unless we see a catch up trade from the rest of the market. Which is essentially what SCHD is (minus Broadcom which is an AI play).
The rest of the market has to catch up to the Magnificent Seven and that has started to happen as Mark Newton from Fundstrat pointed out in TCAF 98. Obviously there is no way to know for certain but we are in a bull market, as things stand now.
How SCHD Dividend can climb based on Yield on Cost over time:
Annualizing the most recent 0.66 cents a share dividend payment, which is about to hit today, we get to a 3.73% annual dividend based on Friday’s Close at $70.71.
The 52 week high on the stock is $79.49. If you bought at $70.71 at close on Friday, over time the ETF will get back to $79.49, then your effective dividend rate on your initial principal will be 4.19%. Please take note that this is on principal and not your equity. The reason is that you are calculating the dividend payment on the money you invested and not on the gains you had on it because of capital appreciation.
You can either think of it as getting 4.19% on your principal invested or you can think of it as 3.73% dividend on your total equity knowing that a portion of the total equity was not invested by you but the asset grew into it and that will continue to happen. Hold and reinvest your dividends.
This is where the covered call strategies fail to compete with SCHD. Add to that the fact that the covered call strategy is structurally built in a way that it cannot match the returns of the underlying in a bull market.
How much dividend will SCHD pay you in 5/10 years:
If you bought SCHD 5 years ago, your effective dividend yield on principal today would be 5.16%.
If you bought SCHD 10 years ago, your effective dividend yield on principal today would be a staggering 7.96%.
So get in early, be lazy and stay as long as you can and 10 years later when you look at your SCHD investment that you put in today, you’ll know that you are making twice as much dividend on your investment as other people who are just figuring it out now. And as you get closer to retirement, this money you put in today will fund a large chunk of your retirement, without you having to sell a growing asset (depending on how much you put in and spend in retirement of course).
Assumption:
Throughout this article I assume that SCHD will go up and surpass its 52 week high, this is based on the assumption that the economy continues to do well, and the managers at Schwab continue to make the ETF effectively. I think it is ‘when’ not ‘if’.
I would not have this level of confidence in any company but because this is a managed dividend strategy and can easily replace bad companies with good ones, over time, this is the best dividend vehicle out there.
It is possible that the market takes a downturn here and we don’t make the $79.49 price for a couple of years (or more) but that is the best thing that can happen to you, if you are just starting to accumulate.
My Positioning:
I am under invested in SCHD and will make big moves over the next couple of weeks. I have limit orders in place for every 50 cent drop in stock price. Still Dollar Cost Averaging but using limit orders and with higher $$ per day than usual.
I have no target goal for SCHD. As mentioned, SCHD is one of the 4 ETF’s I picked in my Ideal US Equity ETF Portfolio and I intend to plough everything I make over the years into these 4 ETFs. The only upper limit will be a % of my net worth that I want to expose to US Equities.
Eventually those 4 ETFs will represent my entire US Equity exposure (there will always be some pet plays but the exposure will be tiny compared to what I will build using those ETFs).
Past performance is no guarantee of future results.
The ideas discussed in this article should not be constituted as investment advice.
Disclosure: We own positions in some/all of the tickers mentioned in this article.