2023-06-16 09:00:00 ET
Summary
- The Schwab U.S. Dividend Equity ETF remains a superior quality dividend ETF compared to the Global X S&P 500 Quality Dividend ETF, mainly due to SCHD's 5-year dividend growth track record requirement.
- SCHD also has a lower expense ratio and a higher dividend yield than QDIV, making it a more attractive investment option.
- Despite some advantages of QDIV, such as a lower P/E ratio and monthly dividend payout schedule, SCHD continues to be the preferred choice for dividend growth investors.
I have written about the Schwab U.S. Dividend Equity ETF ( SCHD ) on a few occasions, highlighting why I view it as a "must-own" ETF for dividend growth investors, whether they are primarily ETF investors or stock-pickers.
- SCHD: The Best Positioned Dividend ETF Against The Coronavirus (March 2020 - Strong Buy)
- Why SCHD Is A Dividend Growth Investor's Dream ETF (November 2022 - Buy)
SCHD is my largest investment at about 6.7% of my portfolio value. I like it for its consistent ability to generate strong returns with relatively low volatility and especially for its excellent (and unique) combination of an above-average yield with above-average dividend growth.
But the worst thing any investor can do is to rest on their laurels, stop keeping up with their investments, and simply assume that past performance will continue into the future. That's especially true in the world of ETFs, where competitors are frequently introducing new fund products with new, potentially improved stock-picking methodologies.
With this in mind, let's take a look at one of SCHD's competitors, the Global X S&P 500 Quality Dividend ETF ( QDIV ) .
Although SCHD doesn't have "quality" in its title, its methodology does include a quality filter. For example, holdings must have relatively low leverage, high cash flow to debt, and a high return on equity.
Let's explore QDIV to see how the newer ETF stacks up against its blue-chip competitor.
Basic Characteristics & Metrics
QDIV is based on the S&P 500 Quality High Dividend Index .
The investable universe starts, obviously, with the S&P 500 and follows these filtering and weighting steps:
- Listed in the US
- Minimum market cap of $6.1 billion
- Sufficient levels of trading liquidity
- Top 200 of S&P 500 by dividend yield
- Top 200 of S&P 500 by quality score, measured by: return on equity, accruals ratio, and financial leverage
- Minimum number of holdings of 50 (if less than 50, the above criteria are gradually relaxed until at least 50 holdings are achieved)
- Sector weighting capped at 25%
- Rebalanced semi-annually in June and December
Although there is a minimum number of holdings, there does not appear to be a maximum. Currently, QDIV has 76 holdings, compared to SCHD's slightly over 100.
Compare QDIV's stock-picking methodology to that of SCHD. Here are SCHD's three basic filters presented in order of their sequential importance:
- Dividend Growth Record : SCHD first requires holdings to have at least 10 years of consecutive dividend payments as well as 5 years of consecutive dividend growth.
- Quality : SCHD next filters for quality factors like relatively low debt, high free cash flow as a share of debt, and high return on equity.
- Yield : Only after filtering down to companies with the required dividend histories and quality factors does SCHD weight by dividend yield.
While SCHD has a dividend growth filter, QDIV does not. This fills SCHD's portfolio with longtime dividend payers, while QDIV's methodology might allow it to pick up some dividend growth stocks that just started paying or growing their dividends. Otherwise, the yield and quality requirements are similar across the two ETFs.
Here are some basic metrics for the two ETFs:
QDIV | SCHD | |
# Holdings | 76 | 104 |
30-Day SEC Yield | 3.25% | 3.62% |
P/E Ratio | 13.1x | 13.9x |
Expense Ratio | 0.20% | 0.06% |
Distribution Frequency | Monthly | Quarterly |
SCHD's dividend yield is a little over 10% higher than QDIV's, perhaps because it has a larger investable universe and lower minimum market cap of $500 million.
At the same time, SCHD's price-to-earnings ratio is slightly higher than QDIV's, which implies that QDIV's holdings have lower payout ratios than SCHD's.
When it comes to the expense ratio, QDIV's is a little over 3x higher than SCHD's, but both are relatively low as far as specialized ETFs go.
Finally, it may make a difference to some investors that QDIV pays a monthly dividend/distribution, and its dividend does not fluctuate from month to month. Over the past several months, QDIV has paid a dividend of 9 cents per share.
Also note that both QDIV and SCHD have relatively low betas, measuring volatility against the S&P 500 over the past three years.
Although at the beginning of January 2022, QDIV's beta was over 1, meaning that it was more volatile than the S&P 500, it has since dropped to being roughly in line with SCHD.
Portfolio Comparison
When it comes to each ETF's portfolios, there are some notable differences that make a comparison interesting. Here's each ETF's sector weightings:
QDIV | SCHD | |
Consumer Staples | 18.6% | 13.3% |
Industrials | 15.9% | 17.8% |
Technology | 13.9% | 12.5% |
Energy | 11.6% | 9.3% |
Healthcare | 9.4% | 16.3% |
Materials | 7.7% | 3.4% |
Financials | 7.7% | 14.1% |
Consumer Discretionary | 6.9% | 8.1% |
Communications | 3.3% | 4.9% |
Real Estate | 2.6% | 0% |
Utilities | 2.5% | 0.3% |
Compared to SCHD, QDIV has notably higher weightings in consumer staples, technology, and energy, while SCHD has higher weightings in industrials, healthcare, and financials.
The differences don't end there. While most dividend ETFs tend to share at least a handful of the same stocks in their top ten holdings, QDIV and SCHD actually feature almost completely different sets of top tens:
QDIV Top Ten Holdings:
Global X QDIV Website
SCHD Top Ten Holdings:
Schwab SCHD Website
As you can see, the two ETFs share only one holding in their top ten: Broadcom ( AVGO ). Given AVGO's incredible ~60% surge in stock price year-to-date, it's not surprising to see it top both portfolios by weighting. Most of these ETFs' holdings are relatively low-beta, which makes a huge move like AVGO's rare.
Also notable is the lack of dividend growth track record requirement in QDIV's methodology allowing in companies like Molson Coors ( TAP ) and Tapestry ( TPR ), which suspended their dividends during the COVID-19 pandemic.
In contrast, by nature of its stock-picking methodology, 100% of SCHD's holdings increased their dividends for at least the last five years, which includes the entirety of COVID-19.
When it comes to the recession-resilience of each ETF's dividends, then, it's important to consider whether SCHD's portfolio holdings were particularly well-suited to survive COVID with dividend growth records intact or if SCHD is more recession-resistant in general.
Total Return Performance
Turning to total return comparisons, we find that, since QDIV's inception in mid-2018, it has significantly underperformed SCHD.
However, although QDIV was underperforming even before COVID-19, it appears that the primary cause of this underperformance was the sharp stock selloff in early 2020.
If we zoom in to just the period from the beginning of 2022 to today, when the current inflation/interest rate-induced bear market has been in effect, QDIV has actually outperformed SCHD, generating slightly positive total returns.
If we look at total returns for 2023 YTD, we find the same result: moderate outperformance from QDIV.
I believe QDIV's heavier weighting in consumer staples, technology, and energy have been the primary drivers of this outperformance since the beginning of 2022.
Dividend Growth Head-To-Head Comparison
It is in a comparison of dividend growth between the two ETFs where SCHD really shines against QDIV.
Since QDIV's inception was in mid-2018, we have limited history for the fund/index, but we can look at its dividend growth since its first full year as a publicly traded ETF. Although it's a fairly short time period, let's compare the dividend growth between these two ETFs from the first year after QDIV's inception to the last twelve months.
QDIV | SCHD | |
TTM Dividends | $1.03 | $2.64 |
H2 2018 / H1 2019 Dividends | $0.74 | $1.55 |
Total Dividend Growth | 39.2% | 70.3% |
As you can see, SCHD's dividend growth absolutely stomps that of QDIV, largely because SCHD's dividends kept rising over that timeframe while QDIV's dividend dipped slightly in 2020 and 2021.
Here it seems that SCHD's dividend growth filter basically acts as a measurement of dividend quality and safety. Companies that grow their dividends consistently tend to keep growing their dividends consistently.
Bottom Line
QDIV does have some things going for it, such as its lower P/E ratio and monthly dividend payout schedule. But overall, in my view, SCHD remains the superior quality dividend ETF, largely because of its 5-year dividend growth track record requirement. Also, SCHD's 0.06% expense ratio is one of the lowest in the industry, giving investors the ability to enjoy SCHD's well-designed dividend portfolio at a very low management fee.
As for me, although I do own a small position in QDIV in my ETF-only Roth IRA, my largest position in both my Roth IRA and my taxable account is and will remain SCHD.
For further details see:
QDIV Vs. SCHD: Comparing 2 Quality-Focused Dividend ETFs