SCHD (Schwab U.S. Dividend Equity ETF) has become the gold standard for dividend growth investing due to its rules-based quality screening. Understanding its factor strategy helps investors evaluate whether it aligns with their goals.
SCHD's Four-Factor Quality Screen
SCHD selects stocks based on:
1. Cash Flow to Debt Ratio: Measures ability to service debt and maintain dividends during stress 2. Return on Equity (ROE): Profitability indicator showing efficient use of shareholder capital 3. Dividend Yield: Current income relative to price (but not chasing highest yields) 4. 5-Year Dividend Growth Rate: Commitment to increasing shareholder returns
Selection Process
1. Start with Dow Jones U.S. Dividend 100 Index universe 2. Require 10+ consecutive years of dividend payments 3. Exclude REITs (different risk profile) 4. Score companies on the four factors 5. Select top 100 stocks by composite score 6. Weight by modified market cap (4% individual cap)
Why SCHD Works
Quality Bias: Factor screening eliminates dividend traps (high yield from falling prices).
Diversification: 100 holdings across sectors reduces single-stock risk.
Low Fees: 0.06% expense ratio keeps more money compounding.
Tax Efficiency: High qualified dividend percentage (~95%+).
Growth + Income: 3.5-4% yield with 10%+ historical dividend growth.
SCHD Holdings Profile
Typical top holdings include:
- Financials: Broadcom, Texas Instruments
- Healthcare: AbbVie, Pfizer, Merck
- Consumer: Coca-Cola, PepsiCo, Home Depot
- Industrials: Lockheed Martin, UPS
Performance Characteristics
- Total Return: Historically competitive with S&P 500
- Volatility: Lower than broad market
- Downside Protection: Quality tilt helps in corrections
- Income Growth: Dividend increases annually
Limitations
- No Tech Growth: Excludes non-dividend payers (early Amazon, Tesla)
- Value Tilt: May lag in growth-driven markets
- U.S. Only: No international diversification
- Annual Rebalance: Factor exposure varies with market conditions
Complementary Holdings
Many investors pair SCHD with:
- VIG: Vanguard Dividend Appreciation (growth focus)
- JEPI: For higher current income
- VTI/VOO: For broader market exposure
DivAgent Educational Standards
This definition is part of the DivAgent Income Academy curriculum. Our glossary is designed to bridge the gap between institutional jargon and retail investor understanding. Each term is reviewed by our Research Team for accuracy, specifically in the context of:
- Tax implications (Ordinary vs. Qualified)
- Impact on Total Return calculations
- Relevance to Option-Income strategies
- Risk assessment in a retirement portfolio
*While we strive for precision, financial terminology can evolve. Always verify definitions with official regulatory sources (SEC, IRS) when making tax or legal decisions.