With just under $100 billion in net assets and a 3.3% yield, the Schwab U.S. Dividend Equity ETF (SCHD 0.92%) is an ultrapopular exchange-traded fund (ETF) for generating passive income. The fund is crushing the S&P 500 index (^GSPC +0.41%) year to date — up 18.1%, compared to 10.7% for the index. But the bulk of those gains came in the first six weeks of the year as investors gravitated toward value stocks.
Over the last five months, the Schwab U.S. Dividend Equity ETF is only up 3.4%, while the S&P 500 is up 10.9% — driven by massive gains in megacap tech stocks.
Here’s why the Schwab U.S. Dividend Equity ETF has stalled out. Let’s determine whether it’s a buying opportunity for patient investors.
Image source: Getty Images.
An ETF built around value-focused sectors
The Schwab U.S. Dividend Equity ETF is intended to provide investors with a steady stream of passive income, by investing primarily in industry-leading, large-cap, dividend-paying value stocks.
Unlike the S&P 500, which is heavily weighted toward growth-focused sectors like technology and communications, a whopping 55.1% of the Schwab U.S. Dividend Equity ETF is invested in consumer staples, healthcare, and energy, while less than 20% is in tech and communications. For context, consumer staples, healthcare, and energy make up 16.5% of the S&P 500, while tech and communications account for 47.3%.
Growth-focused sectors had a slow start to the year as investors questioned record capital expenditures on artificial intelligence (AI). But while many of the largest tech stocks by market cap remain in large drawdowns from their all-time highs, the massive boom in semiconductor stocks — especially memory-chip stocks — has propelled the S&P 500 to new highs. The iShares Semiconductor ETF, which tracks the industry, has nearly doubled year to date — up 93%, compared to 29% for the tech sector. And the semiconductor industry alone now makes up roughly 43.5% of the tech sector.
In sum, semiconductor stocks are providing market-moving gains to the major indexes. The Schwab U.S. Dividend Equity ETF holds two semiconductor stocks: Texas Instruments (4% weighting) and Qualcomm (3.1% weighting). But overall, investors should expect the ETF to lag the S&P 500 when growth-focused sectors are fueling market gains.
Schwab U.S. Dividend Equity ETF
Today’s Change
(-0.92%) $-0.30
Current Price
$32.26
Key Data Points
AUM
$99B
Dividend Yield
3.25%
Expense Ratio
0.06%
Top Holdings
UNH
4.48%
HD
4.36%
ABT
4.28%
Generating passive income from a portfolio of stocks
While some investors focus exclusively on total returns — capital gains plus dividends — others may be looking to supplement retirement income by targeting dividend-paying value stocks, many of which are less volatile than the S&P 500. The Schwab U.S. Dividend Equity ETF is a good buy for investors who value passive income as a core element of an investment thesis. The fund’s quarterly dividend payments allow investors to book returns without selling shares.
Because it invests in a basket of stocks, the ETF doesn’t cap upside potential. In contrast, covered-call ETFs like the JPMorgan Equity Premium Income ETF (JEPI 0.20%) and the JPMorgan Nasdaq Equity Premium Income ETF (JEPQ +1.17%) achieve their high yields by selling calls on the underlying indexes they track (the S&P 500 for the former, and the Nasdaq-100 for the latter).
Over the last decade, the Schwab U.S. Dividend ETF has produced a total return of 222%, compared to 319% for the S&P 500. Despite its high yield, capital gains have historically been a core driver of the Schwab ETF’s overall performance rather than dividends. This dynamic starkly contrasts with purely income-focused covered-call ETFs. And in the process, the Schwab U.S. Dividend ETF has been generally less volatile than the S&P 500 — a good trade-off for investors focused on capital preservation rather than purely on capital appreciation.
A high-yield ETF that can anchor a risk-averse portfolio
The Schwab U.S. Dividend ETF checks all the boxes for a high-yield dividend fund to buy and hold. No single stock accounts for more than 4.5% of the ETF, ensuring that it’s well-diversified. And with a mere 0.06% expense ratio (just $6 for every $10,000 invested), returns aren’t weighed down by high fees.
The ETF’s current yield of 3.3% is more than triple the S&P 500’s 1% — as the modern-day S&P 500 resembles a growth index that’s far less focused on dividend yield than it used to be.
Add it all up, and the Schwab U.S. Dividend ETF is a perfect fit for investors looking to participate in the stock market while generating reliable passive income, without capping their upside potential through a covered-call ETF.
Charles Schwab is an advertising partner of Motley Fool Money. JPMorgan Chase is an advertising partner of Motley Fool Money. Daniel Foelber has positions in JPMorgan Equity Premium Income ETF, JPMorgan Nasdaq Equity Premium Income ETF, and Schwab U.S. Dividend Equity ETF. The Motley Fool has positions in and recommends JPMorgan Chase, Qualcomm, Texas Instruments, and iShares Trust-iShares Semiconductor ETF. The Motley Fool recommends Charles Schwab and recommends the following options: short September 2026 $95 calls on Charles Schwab. The Motley Fool has a disclosure policy.
