In this column, we provide a quarterly update on the Schwab U.S. Dividend Equity ETF™ (NYSEARCA:SCHD). This is an exchange-traded fund, or ETF, and it is not at all exciting or sexy in any way. This is not a get-rich-quick name, but it is also an ETF that you won't lose your shirt in, barring a market collapse/severe correction, in which case, everyone will lose money on paper who is long equities.

We still do not understand the "hate" that this ETF takes. We suppose the argument that it underperforms other assets is a legitimate, but we argue that this ETF does a fantastic job as it was designed to do, be relatively stable while tracking pretty closely the Dow Jones 100 Dividend Index. It is a conservative investment. While it offers a growing dividend over time, those who chase yield at all costs (which is a poor strategy without doing serious homework) will not like this ETF.

If high growth or super high-yield is your game, then SCHD is not for you. So who is it for? It is for those who do not want to worry about their money while being exposed to long-term stable growth and those who enjoy dividend growth investment. This instrument does both. For those conscious of risk, but looking for a combination of some growth and some dividend growth and yield, SCHD is a sleep-well-at-night option, that performs as designed with an ultra-low expense ratio. And when rate cuts are complete over the next few years, the dividend and relatively modest yield will become much more attractive than what you can get in bond funds and money markets. Currently, those offer a risk-free 5% on your cash with no risk, but SCHD, while low risk, offers that dividend growth and capital appreciation.

In this column, we will check in the portfolio and provide insights into the ETF and the holdings, which recently underwent a rebalancing a few months ago. And for those who argue this offers no upside, take a look at the below chart over the last decade plus:

When you look at this chart, it is difficult to argue that this is not a good long-term buy and hold. While it may not be flashy with extreme growth, it has been a good 12 years. If you are looking to find conviction growth ideas, or solid higher yield income ideas, talk to one of our members, and consider joining an investing group, but for those that want something simple and can sleep well at night, we reiterate once again SCHD as a buy.

It has underperformed this largely tech-driven market rally since the bottom in 2022, but, if you pick your spots and buy when the market is red, or dollar cost average long-term as well every two weeks, you will do well here. SCHD does offer a conservative, long-term wealth building opportunity over the course of investing. So for our many new followers who may not be familiar with the ETF, we will provide an update to what it is you are investing in.

The holdings of Schwab U.S. Dividend Equity ETF

The Schwab U.S. Dividend Equity ETF is still invested in a total of 103 diversified holdings across a range of sectors. Here are the current top 10 holdings of The Schwab U.S. Dividend Equity ETF, as of Wednesday, June 19th, 2024:

In this column, we will hone in on the 5 holdings. So, as we see here, 21.53% of the ETF is invested in these top 5 holdings. While that can be a concentration risk, keep in mind that these are high-quality, blue-chip stocks in the ETF. And really, compared to some other ETFs, 4.78% as a top holding really is not all that concentrated, 41.12% of the holdings are in the top 10 positions, but these are very diversified holdings by sector:

So, you can kind of predict where holdings, etc., are going, since the ETF seeks to mimic, before fees and expenses, the total return of the Dow Jones U.S. Dividend 100 Index. So we call this a conservative ETF, and it is pretty straightforward because it is tracking as closely as possible this conservative dividend index.

The financials sector now is the highest percentage of the overall portfolio at 16.94% of the ETF. Then it is followed by healthcare at 15.47%. Technology holdings have fallen from 12.74% of the index in March 2024, down to just 9.33%, while Consumer Discretionary (defensive) rounds out the top 3 sectors at 14.67%. So nearly half of the holdings are in these sectors, but again, it is not surprising if you track the Dow Jones 100 dividend index. Now, with all the grief this ETF catches, the fact is that while the index ebbs and flows with the market, the total returns are impressive, even if conservative, and more so considering the dividend returns.

Of course, the action in trading in the ETF is influenced substantially by the top 5 major holdings, so let's delve into them.

Texas Instruments

Recent BAD BEAT Investing discussed stock Texas Instruments (TXN) which has seen some activist activity, is the top holding in the ETF consisting of 4.78% of the portfolio. This is a major player in the world of semiconductors, and they're one of the top ten semiconductor companies globally based on sales volume. The stock has had an impressive 10-year run, though has struggled in a time when chip stocks have surged:

Until 2022, it had been a very stable grower over the years, and a very blue-chip investment, providing great returns. Further, it has had strong dividend growth.

This dividend growth grade boasts a solid "A" rated growth grade.

Overall, we think this stock is set to move higher with activist involvement and cash flows will improve. We also continue to expect ongoing dividend growth.

Amgen

The second-highest weighting is one of our top picks in the biotech space: Amgen Inc. (AMGN). Here we have another history of strong growth and dividend growth as well. The last ten years have seen substantial returns.

So here we see impressive gains in the last ten years. This growth has been coupled with impressive dividend growth. Take a look at the ongoing consistent dividend hikes year after year.

As we can see above, the dividend has more than doubled in the last 10 years. The stock of AMGN also enjoys a "B" rated dividend growth grade, weighed down some by average EBIT and EBITDA growth as well as operating leverage.

Overall, AMGN has an impressive portfolio of products and more are in the pipeline. We rate this stock a buy, and it is a quality holding in the SCHD ETF.

Lockheed Martin

Moving up into the top 3 is Lockheed Martin (LMT). This name is a giant in the aerospace and defense industry. The stock is another with an impressive run as government defense spend increases year after year.

Now, much like TXN and AMGN, the LMT action has been a bit sideways since 2022. Now you are starting to see why SCHD ETF has been relatively sideways, it is driven by the top holdings that it must hold. That said, like the top two holdings, we see impressive dividend hikes year after year.

The quarterly dividend has more than doubled over 10 years from $1.33 in 2014 to $3.15 in 2024, and you can bet it is going higher again soon. The dividend growth is "A" rated by Seeking Alpha's quant ratings.

As you can see, there is some weight preventing an "A+" rating due to EBITDA and EBIT growth, but impressive metrics elsewhere. Defense spending will only increase. We see LMT stock as a great long-term investment and helps diversify out the top 5 holdings.

Coca-Cola

Perhaps one of the most stable and reliable long-term investments one could ever make is in The Coca-Cola Company (KO). This is a dividend king. An absolute champion that has offered very slow and stable growth over time, and while the capital gains are not impressive, the stable dividend growth has made it a very conservative investment, and a prime example of the type of stock in the SCHD ETF

There is a reason Warren Buffett's longest holding is in KO stock. In the last ten years, the dividend has been raised 1 to 3 cents quarterly each year.

Now, the total returns in the last ten years are not all that impressive, but they are consistent. The dividend growth grade here is 'A+' rated.

Coca-Cola will continue to be a dominant player in the beverage and snack space. Globally, they are everywhere and enjoy pricing power. It is about as boring of a stock as you can find, but it is reliable.

Pfizer

Pfizer (PFE) is a high-yield stock that we have recommended as a buy at $26. This stock had a huge windfall in 2020-2021 from the COVID vaccine mandates. All of that is gone. Now the pipeline is back in focus. The stock has been horrific in the last two years, but we see 2024 as the start of the turnaround, while you collect a 7% yield to wait.

Of course, this chart is filthy. This has been a disastrous two years for PFE shareholders. But a rebound in PFE will boost SCHD ETF. Still, the dividend growth has continued.

The dividend gets raised each year, but the dividend growth grade is an average "C+" rating.

So the grade is weighed down by the earnings collapse the last two years after the COVID bump. As well as hits to cash flow. PFE is now a show-me story, but we think the bottom is in there, and you can collect 7% owning this stock to wait.

Overall take

Now, for the most part, you could purchase these top 5 holdings and have a pretty decent portfolio, though it would not be super diversified with AMGN and PFE, but you could sub out one of them for the 6th holding in Chevron (CVX). Still, then you have a single stock risk. By owning this ETF, it reduces single-stock risk.

One could argue that you also have to own the bad stocks with the good (and some might argue the PFE chart is one of the bad ones), but overall, we think for conservative growth long-term, as well as dividend growth and compounding through reinvestment, conservative investors should strongly consider this ETF.

The Schwab U.S. Dividend Equity ETF is a boring, stable ETF. It has underperformed the tech-driven market, to be sure. And for income thirsty investors, you can get a much better yield elsewhere. You can also get much better growth in tech. There aren't too many stress-free ETFs, and while there is stock/equity risk here, it is low. That caps upside as well, but limits downside to a degree. You should never, ever wake up one morning and see the ETF down double-digits on a random headline, or even if there is a big market selloff. It is just not going to happen. And if it did, well, it's a generational type crash to send this down double-digits in a single session or even a week. Long-term.

Buying this ETF on market dips is wise in our view if you want growing income, and growing capital over time. Critics of the ETF can voice their thoughts below, but at a 0.06% expense ratio, you just cannot deny that SCHD does its job of tracking its linked index quite well.