SCHY - SCHY: International Dividend Equity ETF Above-Average 3.6% Yield Strong Dividend Growth

2023-07-15 02:56:00 ET

Summary

• SCHD is one of the most popular dividend ETFs in the market.
• SCHY is the international version of SCHD.
• An overview of the fund follows.

The Schwab International Dividend Equity ETF (SCHY) is the international counterpart to the well-known, best-performing Schwab U.S. Dividend Equity ETF ( SCHD ). SCHY offers investors diversified exposure to international dividend equities, has an above-average, growing 3.6% dividend yield, and sports a cheap valuation. It also suffers from a high 45.3% turnover rate, and its past performance has been a bit worse than expected, although barely so. I rate the fund a buy, but would pair the fund with other international dividend ETFs to reduce risk.

SCHY Basics

• Investment Manager: Charles Schwab
• Underlying Index: Dow Jones International Dividend 100 Index
• Dividend Yield: 3.61%
• Expense Ratio: 0.14%

SCHY Overview and Benefits

Diversified Holdings

SCHY is an equity index ETF, tracking the Dow Jones International Dividend 100 Index . Said index first selects all international equities with at least 10 consecutive years of dividend payments, subject to a basic set of inclusion criteria. Stocks meeting said criteria are then ranked according to their dividend yield, dividend growth, return on equity, and free cash flow to debt. The top 100-ranked stocks are included in the index. It is a market-cap weighted index, with security and industry caps to ensure diversification.

SCHY's underlying index is reasonably broad, resulting in a well-diversified fund. As mentioned above, the fund invests in 100 companies. Largest of these are as follows:

SCHY focuses on developed markets, with sizable investments in China, and very small investments in a couple other emerging markets. Emerging market companies rarely have consistent dividend growth track-records, hence their (almost) exclusion from the fund / focus on developed markets.

SCHY's largest holdings are generally well-known international large-caps, including several blue-chips, like Toronto-Dominion ( TD ) and Unilever (UL).

As most dividend-focused ETFs, the fund is underweight tech, as said industry rarely pays strong, consistent dividends. On the flipside, the fund is overweight several old-economy industries that do, including consumer staples, materials, and industrials. SCHY's focus on international stocks influences the fund's industry weights too: foreign markets tend to have fewer tech companies, and more industrials and materials than the United States.

Due to the above, SCHY tends to outperform when tech underperforms, as was the case in 2022.

At the same time, the fund tends to underperform when tech outperforms, as has been the case YTD.

As an aside, the above is true for most dividend ETFs, and is something I tend to mention when writing about these . It gets a bit repetitive, but I do think it's an important characteristic of these funds, and something investors need to keep in mind.

SCHY provides diversified exposure to international stocks, a benefit for investors.

Above-Average 3.6% Yield and Strong Dividend Growth

SCHY's underlying index takes into consideration several important fundamental metrics when building its portfolio of stocks, including dividend yields. Doing so boosts the fund's yield to 3.6%, a bit higher than that of most relevant equity indexes. SCHY's dividends are paid semi-annually, as is the case for some international ETFs.

It is, however, a bit lower than that of other international dividend equity index ETFs.

SCHY's above-average dividend yield is something of a benefit for shareholders, although it is a relatively small benefit, and a quite common one.

SCHY exclusively invests in companies with long, consistent track-records of dividend growth, which should result in strong dividend growth for the fund and its investors. SCHY was only created in mid-2021, so its dividend growth track-record is quite short, but also quite robust. The fund's 1H2023 dividend payment is 22.2% higher than the one last year, so 1H2022. The fund's two most recent dividend payments are 38.8% higher than the two before. These are very strong dividend growth figures, although having longer-term growth figures would have been ideal.

As ETF dividends are somewhat volatile, and owing to SCHY's short dividend growth track-record, I don't think comparing the fund's growth to that of its peers / relevant indexes would be wise. Too much volatility means the figures would not be terribly informative.

SCHY's strong dividend growth is a benefit for shareholders, although a somewhat uncertain one, due to the fund's short track-record.

Cheap Valuation

SCHY invests in international equities, which currently trade with a 29.2% discount to comparable U.S. stocks. It is a large discount, and almost twice its historical average.

SCHY itself trades with a 10.8x PE ratio, almost half the S&P 500's 20.0x, and a PB ratio of 2.2x, compared to 4.0x for the index.

Relative to international equity indexes, the fund's PE ratio is low, while its PB ratio is high. It is not immediately clear to me why such a discrepancy, although the fund's comparatively small allocation to tech and focus on stocks with above-average yields might be to blame. Tech tends to sport high book values, as their intangibles (software and the like) are not included in accounting book values. Stocks with above-average yields tend to sport cheap valuations, as it is difficult for expensive stocks to have high yields, hence the fund's lower-than-average PE ratio. A quick look at valuation metrics for the Vanguard Total International Stock ETF ( VXUS ), which functions as an international equity benchmark.

SCHY's cheap valuation could lead to strong capital gains and market-beating returns moving forward, contingent on valuations normalizing. This has not been the case in the past, partly because investors have turned bullish on U.S. equities these past few months, and partly because the fund is quite young, and so has missed some prior periods of international gains / outperformance.

SCHY's cheap valuation is a benefit for the fund and its investors, although not one which has delivered gains in the recent past.

SCHY - Risks and Negatives

High Turnover Rate

SCHY's turnover is quite high, at 45.3%. The fund has, in effect, replaced almost half of its portfolio these past twelve months.

For reference, VXUS's turnover rate stands at 5.1%.

SCHY's high turnover is due to a very finicky index, with lots of inclusion criteria, and the absence of rules limiting turnover. Some indexes are very strict about adding new positions and eliminating existing ones, SCHY is not. Some indexes might decide against significant portfolio movements brought upon by small changes in market conditions, SCHY does not. For ranking indexes, some give higher scores to existing positions, SCHY does not. The fund does very little to limit turnover, so turnover is high.

SCHY's high turnover increases costs for the fund, due to trading fees and spreads. It also increases risk and volatility, as the constant buying and selling exposes the fund and its investors to losses. Short-term equity positions and trades, equivalent to high turnover, are invariably unprofitable for retail investors . High turnover might not be a negative for the best investors and traders, but I'm not sure that the same is true for an index fund.

Performance Track-Record

SCHY's performance track-record seems somewhat below-average. The fund has outperformed relative to international equity indexes, but not relative to U.S. indexes. The fund has outperformed relative to some of the international dividend equity peers, underperformed others. SCHY has underperformed relative to most U.S. dividend equity ETFs, however.

In my opinion, SCHY's overall performance track-record is somewhat below-average, and a negative for the fund and its investors. As the track-record is quite short, and as it isn't too terrible, I don't consider it to be a deal-breaker, or a significant negative.

Conclusion

SCHY's above-average, growing 3.6% dividend yield, and cheap valuation make the fund a buy. As the fund's turnover rate is quite high, I would limit position sizes, so as to reduce risk.

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