SCHD: A Good Choice For Domestic Equity Investing

| About: Schwab U.S. (SCHD)
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The Schwab U.S. Dividend Equity ETF is one of the best dividend ETFs available.

The S&P 500 is exceptionally expensive so investors should be wary about market costs, but they shouldn’t stop doing research.

Allocations for SCHD differ substantially from allocations within the S&P 500. The changes create a substantially more defensive portfolio.

Attempting to replicate the portfolio with only the top 16 holdings would still leave portfolios overly concentrated.

The Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) is one of my favorite dividend ETFs. Even if we look across the span of domestic equity, rather than only dividend focused funds, SCHD is one of the best. There are a few good options for investors, ignoring the current high price on equity indexes. To be clear from the start, this article is not going to focus on the current price of domestic equity exposure. This is going to focus on how what exposures SCHD holds and how those companies fit with my investment strategies for the "core" part of a portfolio.

The S&P 500 and SCHD Allocations

Below you'll see a chart for the S&P 500:

The chart below shows the sector allocation:

The heaviest allocations are technology, financial services, and health care.

Now take a look at SCHD for the equity allocations by sector:

Okay, the huge allocation to technology remains. However, the health care allocations are dramatically lower in favor of "consumer defensive". Those are the kinds of stocks I feel comfortable holding. These are generally companies that are producing products consumers happily buy for themselves. They buy the products whether the economy is booming or in recession. I'm a defensive investor by nature, to so this allocation strategy suits me. While I choose my own stocks for most of my portfolio, when I do decide to grab some diversified exposure, this strategy keeps it within my desired allocation strategy.

The lack of real estate doesn't bother me at all because I cover REITs (real estate investment trusts) and am happy to pick my own companies there. The lack of financial services can be a little challenging because ideally a portfolio would have at least some allocations to companies that see income increase when the Federal Reserve jacks up rates. The banking sector in general benefits substantially from higher rates. The S&P 500 has a ton of exposure there, but SCHD has very little.

I think the other big point for investors in SCHD is simply to remind them to either hold some bonds or grab some utilities. Bonds and utilities tend to carry some significant positive correlation with each other and consequently it can have a stabilizing impact on portfolio values.

Individual Holdings

That brings us into the individual holdings. The top 10% is a huge 44% of the portfolio. This is generally more concentration than I want to see, but several of the top holdings are the first companies I would pick for their sector:

If I need some health care in my portfolio, I would want it to be Johnson and Johnson (NYSE:JNJ). I haven't done enough due diligence to put out a rating or add them directly, but I love a solid dividend champion with a diversified portfolio or products.

Procter and Gamble Co. (NYSE:PG) is another very solid company. It may not be the #1 choice I would make in the consumer staples sector, but it would still be near the top of the list. My #1 choice has consistently been Philip Morris International (NYSE:PM), which has already rallied over 20% since winter. That was great for my portfolio, but a real downer for investing new capital since it was one of the companies I was very comfortable buying between $88 and $96. I loved it there.

Intel (NASDAQ:INTC) would be a top contender for what technology companies I would still want to own. I'm still using an Intel processor in every computer I built or purchased. I don't know what the Surface 3 uses. Why look a gift horse in the mouth? The important thing isn't that the computers happen to have Intel processors. I was only considering computers with Intel processors when I was making the choice. I think Intel still has some pricing power because I believe many consumers will also want Intel in their computers.

Chevron Corp (NYSE:CVX) is also one of my first choices for oil exposure. I still haven't diversified into holding oil, but I would favor holding the huge oil companies that will have more political sway. That puts CVX and ExxonMobil (NYSE:XOM) at the top of my list with consideration for ConocoPhillips (NYSE:COP) and BP (NYSE:BP). All four should be among the first options investors consider if they want to add some oil to their portfolio.

While I generally favor a strategy of building the core of the portfolio from strong dividend stocks to create stable income, I liked T-Mobile US (NASDAQ:TMUS) over Verizon (NYSE:VZ) because I felt TMUS was offering customers a much more appealing package that would attract customers.

Simulating It As a Portfolio

Some investors like to buy the top 10 to 20 holdings of an ETF to simulate the performance. For the long-term buy and hold investor this works so long as they are comfortable staying with those allocations. The ETF can still reallocate based on changes in their underlying index.

For those investors, I simulated a dividend growth portfolio using only the top 16 holdings and scaling their weights up proportionally to reach 100% of a portfolio. The result is seen below:

Based on those allocations, I also pulled the weighting by the portion of the portfolio value and the contribution each stock would have to income for the portfolio:

Both charts were easily created using the Best Real Time Dividend Portfolio Tracker. I love the tool for tracking dividend portfolio performance. If an investor only uses the top 16 holdings, they would be pretty concentrated for both portfolio value and the percent of income from the ticker.


Aside from my lack of enthusiasm about MSFT, most of the companies near the top of the portfolio represent companies that I would be interested in using to represent that sector as part of the portfolio. That speaks to the way the index was constructed and consequently makes SCHD one of my favorite ETFs. That isn't the same as saying that current prices are great. I am still very concerned about the relatively high valuations across the economy. However, on a comparative basis I find myself more comfortable with SCHD than with generic domestic equity indexes. Consequently, I think it is a good choice for investors trying to decide which domestic ETFs they want to build a portfolio around.

I am technically long SCHD, however my position is much smaller than it used to be because the equity prices were simply getting too high for me to feel comfortable.

Disclosure: I am/we are long SCHD, WMT, MO, PM.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Do your own due diligence. No financial advice.