Schwab U.S. Dividend Equity ETF Has A Portfolio Of Quality Stocks That Should Lead To Long-Term Growth

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Ploutos Investing
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Summary

  • SCHD owns a portfolio of high-quality large-cap U.S. dividend stocks.
  • Most stocks in SCHD's top-10 holdings are stocks with moats, and will likely continue to perform well in the long-term.
  • SCHD pays an attractive 3%-yielding dividend but it is fairly valued right now.

ETF Overview

Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) invests in large-cap U.S. dividend stocks. The fund tracks the Dow Jones U.S. dividend 100 Index and selects stocks that has paid 10 consecutive years of dividends. In addition, only stocks with strong profitability that covers their dividend will be selected. The fund has a good exposure to growth and cyclical sectors and should result in fund price appreciation in the long-term. SCHD also pays a 3%-yielding dividend. Therefore, the fund is suitable for investors with a long-term investment horizon that seeks both capital appreciation and dividend growth. However, stocks in SCHD's portfolio are currently fairly valued against their historical averages. Therefore, conservative investors may want to wait for a pullback before initiating a position.

Chart

Data by YCharts

Fund Analysis

A portfolio that is tilted towards growth and cyclical sectors

SCHD has a portfolio of stocks in different sectors. The fund caps each sector to 25% of its total portfolio. This reduces the chance of over-weighting one particular sector. Unlike many other dividend ETFs that have high exposures to defensive sectors, the fund has higher exposure to cyclical and growth sectors. In fact, cyclical and growth sectors represent about 63% of SCHD's portfolio. These sectors include information technology (18.25% of the portfolio), industrials (16.47%), consumer discretionary (10.45%), financials (9.58%), energy (6.67%), and materials (1.86%). We think this should lead to fund price appreciation in the long-term.

Source: Schwab Website

Its top 10-stocks are moaty stocks with competitive advantages over its peers

We have organized in the following table the top-10 stocks in SCHD's portfolio. As can be seen from the table, these stocks are large-cap stocks and these stocks represent about 44% of SCHD's portfolio. SCHD caps each stock at 4.5% of its portfolio and re-balances every quarter. Therefore, we expect some of these stocks that are above 4.5% of its portfolio to be re-balanced in the next re-balancing date. SCHD's top-10 stocks are quality moaty stocks. In fact, all of the top-10 stocks received wide or narrow moat status by Morningstar. In order to be included in SCHD's portfolio, stocks must have consistently paid 10 years of dividend and have strong profitability to support their dividends. The result is a portfolio that have competitive advantage over their peers. Therefore, we expect many of these companies to continue to thrive.

Ticker

Name

Weight (%)

Moat Status

INTC

INTEL CORP

4.63

Wide

HD

HOME DEPOT

4.56

Wide

PFE

PFIZER

4.52

Wide

BMY

BRISTOL MYERS SQUIBB

4.52

Wide

KO

COCA COLA

4.51

Wide

XOM

EXXON MOBIL

4.46

Narrow

PG

PROCTER + GAMBLE

4.45

Wide

VZ

VERIZON COMMUNICATIONS

4.43

Narrow

PEP

PEPSICO

4.41

Wide

TXN

TEXAS INSTRUMENTS

3.65

Wide

TOTAL

44.14

Source: Created by author

SCHD is fairly valued

Below is a table that shows the forward P/E ratios and 5-year P/E ratios of the top-10 stocks in SCHD's portfolio. These top 10 stocks represent about 44% of its portfolio. As can be seen from the table, the average forward P/E ratio of 18.40x is slightly above its 5-year average of 18.07x. Therefore, we believe SCHD's shares are currently fairly valued.

Ticker

Name

Weight (%)

Forward P/E

5-Year P/E

INTC

INTEL CORP

4.63

12.42

12.54

HD

HOME DEPOT

4.56

20.92

20.77

PFE

PFIZER

4.52

13.64

13.46

BMY

BRISTOL MYERS SQUIBB

4.52

11.29

19.66

KO

COCA COLA

4.51

24.57

21.7

XOM

EXXON MOBIL

4.46

17.73

19.4

PG

PROCTER + GAMBLE

4.45

25.64

20.91

VZ

VERIZON COMMUNICATIONS

4.43

12.42

12.18

PEP

PEPSICO

4.41

22.83

20.68

TXN

TEXAS INSTRUMENTS

3.65

23.75

19.92

TOTAL OR WEIGHTED AVERAGE

44.14

18.40

18.07

Source: Created by author

Risks and Challenges

Stocks in SCHD's portfolio may still face a dividend cut

While SCHD screens stocks that have consistently paid their dividend in the past 10 years and whether they have enough earnings to cover their dividends, these are backward looking information. In other words, it is still possible that these stocks may reduce their dividends. While we think the probability is low (as most companies have economic moat), there is still this possibility especially during harsh economic conditions.

Investor Takeaway

We like SCHD's portfolio of quality dividend stocks. Most stocks in its top-10 holdings have either narrow or wide moats. The stocks also offer investors with a 3%-yielding dividend. Therefore, we believe this stock is a nice good holding for investors with a long-term investment horizon. However, the fund appears to be fairly valued right now. Therefore, conservative investors may want to wait for a pullback.

This article was written by

Ploutos Investing profile picture
6.64K Followers
I am a value focused investor. Stocks rise and fall for many different reasons that we often cannot predict. Eventually, it is those companies with a wide moat and the ability to generate cash flow that prevail. Therefore, my investment focus is to find value stocks that are able to generate cash flow, with sustainable dividends and provide growth over time. I focus my attention on analyzing large-capped dividend growth stocks, REITs and ETFs. I aim at providing a quarterly update and insights on stocks I follow. Please feel free to browse the articles that I wrote and provide any comments.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.

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