SCHD: 4 Reasons The Gold Standard High-Yield ETF Is A Rich Retirement Buy (NYSEARCA:SCHD)

For those who love generous, safe, and steadily growing dividends, there are few better single-ticker retirement solutions than Schwab U.S. Dividend Equity ETF™ (NYSEARCA:SCHD).

Currently, the economy and stock market are at a potential inflection point. Very smart people on Wall Street are arguing persuasively that stocks will rip 10% to 20% higher or fall as much as 30% in the coming months.

Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts and concentrate on what’s happening to the companies in which you’ve invested.”— Peter Lynch (30% annual returns for 13 years at Fidelity Magellan fund).

So, let’s take a page out of Peter Lynch’s playbook, and instead of trying to think of all the reasons you should be hiding under your bed in cash, let me show you why SCHD is one of the best exchange-traded funds, or ETFs, you can safely buy today, as long as your time horizon is at least 5+ years.

Reason 1: The Gold Standard Of High-Yield ETFs

Are there higher-yielding ETFs than SCHD? You bet. But max yield should never be your goal; only max safe and sustainable yield.

The highest-yielding quintile and 20% yielding stocks usually underperform because they are cheap for a reason.

The best long-term income growth investments are growing the 1st three quintiles. Do you know where SCHD lies? Just past the 2nd quintile cutoff (3.4%) at the start of the 3rd quintile.

The rare times when max yield benefited the most was during the 1930s when the Great Depression meant growth was hard to come by. But in most decades, SCHD’s 2nd/3rd quintile focus would have served income investors very well.

OK, SCHD appears well situated by yield strategy, the sweet spot of yield and growth, and strong returns. But how do we know it truly is a rock star of its strategy and not just a very well-marketed and hyped ETF? How can we tell that Dividend Sensei isn’t just schilling for Schwab?

• I’ve never accepted payment from any company to make recommendations and never would
• my integrity is my livelihood and no check is big enough to buy my soul.

SCHD is large, liquid, and costs almost nothing compared to other 5-star-rated high-yield ETFs.

Even iShares, the king of low-cost ETFs, can charge 4X the fees, and other 5-star value funds can charge as much as 12.5X.

That doesn’t mean they aren’t worth it, but performance isn’t guaranteed, and fees are.

The entire Vanguard empire is built on the idea that you should focus on what you can control: low fees.

What is SCHD’s secret?

Reason 2: An Amazing Quality Screening Process You Can Trust

Schwab U.S. Dividend Equity ETF SCHD has proved that it can translate its sensible, risk-conscious approach into better risk-adjusted performance than the Russell 1000 Value Index. It merits a Morningstar Analyst Rating upgrade to Gold from Silver. – Morningstar.

When you buy an ETF, you are buying a strategy, not individual companies.

In the case of SCHD, you’re buying one of the best value ETFs ever devised.

Over the last five and ten years, SCHD has been in the top 2% of value ETFs, with tax-adjusted returns of 10.6% annually and 12.2% since inception. Taxes take out less than 1% of annual returns, which is remarkably tax-efficient given that more of its returns are taxed each year at 15% to 23% for most people.

That top 2% performance is out of about 1,000 rivals, meaning only about 20 value ETFs have done better than SCHD over the decade.

OK, but what about this year? YTD, SCHD is in the bottom 11% of its peers, so what’s up? Were some see disappointing returns, I see opportunity.

This fund fully replicates the Dow Jones U.S. Dividend 100 Index, which features 100 stocks that have paid dividends for at least 10 consecutive years and boast the financial health to continue their streak. – Morningstar.

SCHD begins with a quality screen based on a dividend streak, which Ben Graham was a fan of (a 20-year streak is a Graham sign of excellence).

It then cranks up the quality screen a bit more, with four specific statistically proven measures of safety and quality.

This is quantitative investing at the master level. To paraphrase Morningstar, “SCHD’s management is a chess master in an industry where others are playing checkers.”

That is why I am so excited to recommend SCHD today as one of my favorite Labor Day bargains!

Reason 3: Incredible Value In An Overvalued Market

Do you know why SCHD and value are generally sucking in 2023? Because of regional banks.

This is the height of the regional banking crisis.

What SCHD Owns Today

SCHD is a more concentrated portfolio with 4% risk caps, which usually means higher ownership of less popular stocks.

But how worried should you be about owning regional banks like USB and M&T? Not at all. If those super regionals go down, we all have bigger issues to worry about than our portfolios.

• In the apocalypse, the only safe place is Robert Kiyosaki’s Doomsday Bunker 😉

SCHD Historical Valuation

Click to enlarge

(Source: FactSet Research Terminal.)

SCHD trades at a 17% discount, the mirror image of the 17% overvalued S&P 500.

If the S&P is a stupid price going into a recession, SCHD is the anti-stupid ETF choice, already largely priced for recession.

SCHD Bottom-Up (Weighted By Company) Analyst Consensus Estimates

SCHD is priced for -9% EPS growth in 2023, followed by steady growth of 8% to 9% in the following two years and accelerating dividend growth.

No dividend cuts are expected from its 100 world-beater high-yield blue chips.

S&P Bottom-Up (Weighted By Company) Analyst Consensus Estimates

12% EPS growth in 2024 and 2025? According to the bond market, that would be unprecedented good luck for an economy headed for a mild recession.

Yup, 25% EPS growth in the middle of this seems reasonable! And let’s pay a 17% premium on top, just because we love to live dangerously;)

8X cash flow for world-class companies like these is an anti-bubble valuation for companies yielding a very safe 4% that are growing at 10%, according to Morningstar.

That’s 13% to 15% long-term returns expected from SCHD, returns that it is indeed known for delivering.

Reason 4: A Proven Strategy For Growing Wealth And Income

Historical Returns Since 2011

SCHD’s returns have been among the best of any value or dividend ETF.

The average 12-month rolling return for SCHD has beaten the S&P 500’s since inception. In one of the biggest tech rallies in history, when almost no value or dividend ETF could keep up with the market, SCHD managed to do it.

No FOMO here. No selling a perfectly good ETF out of disgust for SCHD investors.

Do you know how rare it is to find an ETF that doesn’t have a single year of negative dividend growth?

Just look at how ProShares S&P 500 Dividend Aristocrats ETF (NOBL), the official dividend aristocrat ETF, does in terms of dividend dependability.

Better Dividend Dependability Than The Official 100% Aristocrat ETF

More reliable dividend growth than dividend aristocrats, faster dividend growth than aristocrats, and look at overall income growth.

If you bought SCHD at inception in late 2011, today, you’re earning a 14% yield on cost.

• 3.2% yield in 2012 and 13.8% yield on cost today
• 14.9% annual income growth over ten years.

How many dividend ETFs can double your income every five years? Heck, how many dividend stocks can do that?

• Vanguard High-Yield ETF: 10.9% annual income growth
• Vanguard REIT ETF: 7.4% annual income growth.

Risk Profile: Why SCHD Isn’t Right For Everyone

No ETF is perfect and SCHD has a few downsides.

Like with any ETF, you can’t control what is owned. You’re buying the strategy, including the safety and quality screening system proven by Schwab over the last 12 years.

International Paper is something SCHD owns, and it’s not exactly a wonderful company.

• IP has a -2% CGAR long-term growth consensus.

Tyson Foods (TSN)? It’s been struggling during the Pandemic and potentially could face the mother of all boycotts in the future if the inevitable H5N1 bird flu (which Russian Scientists think could kill 1 billion people in the first six months alone and up to 2.2 billion overall) comes out of its facilities.

Or how about Broadcom (AVGO), the red-hot #1 holding for SCHD right now?

Zion Bancorp? Whirlpool? Not exactly companies I’m eager to own, but SCHD owns all of them.

Remember that with any ETF, you’re buying the strategy more than the underlying names.

That’s what makes them “risk-free single ticker retirement solutions.”

Over 30 years, there is a 97.5% statistical probability that SCHD will beat inflation and make you money. The 2.5% chance that SCHD doesn’t make money? That’s Goldman’s estimate of the risk that the U.S. and Russia have a nuclear war and the S&P suffers “a complete loss.”

In the event of nuclear war, the living envy the dead, and we have bigger problems than portfolio returns.

Finally, let’s not forget that FOMO is always a risk with any ETF.

Let’s be real. If you’re on Seeking Alpha, you likely check the stock market daily. It’s not the optimal thing to do, but we’re all addicts and can’t help ourselves.

FOMO is a real risk. If the market is skyrocketing like this year and SCHD is flat, you should be excited by the bargain-hunting opportunity. You’re likely considering selling SCHD disgustingly and chasing the market’s momentum.

I’m here to point out that over the last three years, SCHD has beaten the S&P and is likely to keep outperforming over the long-term.

Over 12 months valuation is 95% irrelevant, in the long-term it’s almost all that matters

If you think valuations don’t matter, you’re 95% right in the short term and 80% wrong in the long term. Over 30 years, 97% of returns are explained by fundamentals and valuations.

Bottom Line: SCHD Is One Of The Best Labor Day Buys You Can Make Right Now

In 2022, inflation surged to 8%, the highest level in 42 years. How many people got a raise of 8% and kept up with inflation? Very few.

SCHD raised its dividend by 14% in 2022.

• 2021: 4% dividend growth
• 2020: 28% dividend growth
• 2019: 13% dividend growth
• 2018: 14% dividend growth
• 2017: 4% dividend growth
• 2016: 10% dividend growth
• 2015: 5% dividend growth
• 2014: 18% dividend growth
• 2013: 16% dividend growth
• 2012: 9% dividend growth.

In six of the last ten years, SCHD has doubled its dividends.

It’s grown its dividends by 15% annually for a decade. That’s doubling every five years.

Are you looking for safe, high income that grows rapidly and steadily in good economic times and bad? SCHD is the gold standard.

And today, its 17% historically undervalued, the mirror image of the S&P 500’s 17% premium.

• 3.5% yield
• 9.8% growth consensus (Morningstar, bottom-up)
• 13.3% long-term return consensus
• discount to fair value: 17%
• 5-year valuation boost: 3.8% annually
• 5-year consensus total return potential: 17.1% CAGR = 120% vs 40% S&P 500.

3.5% very secure yield from 100 of the best high-yield world-beaters you can own, all at an anti-bubble valuation that could triple the market’s returns in the next five years.

That’s a wonderful high-yield blue-chip buying opportunity for this labor day!

From everyone here, please have a safe, healthy, and relaxing long weekend:)