SCHD ETF Is My Default Buy At Current Levels

Having a well-diversified basket of quality dividend payers is one of the best ways to sleep well at night when it comes to portfolio management. That’s because while it’s tempting to go “all in” with new money on higher risk bargains, it’s also good to have good default choices to balance out risk.

Such I find the case to be with the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD), which I find to be attractive at its current level in the mid-$70s. In this article, I highlight what makes SCHD a good option to ride out turbulent times, so let’s get started.

Why SCHD?

SCHD is an ETF that tracks the performance of the Dow Jones U.S. Dividend 100 Index. As one would expect from this dividend ETF, SCHD has higher exposure to income-oriented industries such as Financials, Industrials, Consumer Defensive, and Pharmaceuticals.

This ETF is ideal for those wanting to shelter capital away from non-dividend paying growth stocks such as Google (GOOG), which has had a reckoning as of late, reflected by the mass 12,000 person layoff announced a few days ago. These growth companies appear to have expanded too far too fast, and is seeing slowing growth, as further demonstrated by layoffs at Amazon (AMZN) and Microsoft (MSFT).

While SCHD does have exposure to tech companies, its allocation is geared towards well-respected dividend growers in this industry with decent starting yields, such as Texas Instruments (TXN) and Cisco Systems (CSCO), which are members of SCHD’s top 10 holdings. For reference, TXN has a starting yield of near 3% and a 5-year dividend CAGR of 17% and Cisco has a 3.3% dividend yield and a 5-year dividend CAGR of 5.6%.

Looking forward, I see potential for SCHD’s diversified basket of dividend payers to do well, as this month’s CPI report indicated that inflation is easing up. This has broad-based implications for the overall economy as cooling inflation as a result of abating commodity prices mean that margins can improve. Hoya Capital just issued a report noting as follows:

Following the cooler-than-expected CPI report last week, investors saw another encouraging sign that inflationary pressures have eased with Producer Price Index data this week showing that wholesale prices fell sharply in December. The headline PPI Index for Final Demand declined 0.5% for the month – a sharper decline than the 0.1% consensus forecast – which dragged the annual increase to 6.2%, the lowest annual level since March 2021 and down considerably from the 10% annual increase in 2021.

Notably, the PPI Goods Index dipped 1.5% in the month – helped by a 7.9% plunge in energy prices and a 1.2% decline in food prices. The PPI Services Index increased by 0.1%, pulling the annual increase down to 5.0% – the lowest since early 2021. Notably, other more-forward-looking metrics in the report showed even more pronounced declines in inflationary pressures. The Processed Goods for Intermediate Demand Index plunged 2.8% in December – the sharpest decline on record behind the “shutdown” month of April 2020.

Meanwhile, SCHD remains a solid option for dividend investors due in part to its low 0.06% expense ratio, which earns it an A+ expense grade. The main draw for SCHD is its respectable 3.4% starting yield. While this in and of itself is not that high, it does come with a 5-year dividend CAGR of 13.7%. Applying the rule of 72, this means that SCHD’s dividend yield could double to 6.8% in 5.2 years should it hold the same level of dividend growth. As shown below, SCHD earns an A+ dividend grade.

At the same time, SCHD’s above average dividend grade comes with below average risk as it has a B+ risk rating, driven in part by very low short interest in its underlying holdings at just 0.12%, compared to the 0.53% median across the ETF universe. Lastly, SCHD scores a 4.07 Buy rating score on Seeking Alpha’s Quant rating system, with mostly A scores across momentum, expenses, dividends, risk and liquidity, as shown below.

Investor Takeaway

In summary, the Schwab U.S. Dividend Equity ETF could be an attractive addition to any income-oriented portfolio. With its low 0.06% expense ratio and 5-year dividend CAGR of 13.7%, SCHD is well positioned to provide investors with both income growth and capital appreciation potential over the long haul.

Furthermore, its underlying companies have low short interest and its risk profile is below average, providing an additional layer of safety for investors. For those looking for dividend growth with a respectable starting yield, SCHD could be a solid option at current levels.