2023-09-20 10:39:56 ET
Summary
- SCHD and DJD are two high-yielding dividend ETFs that hold high-quality blue chip stocks and trade at similar valuations: approximately 17x forward earnings and 13x trailing cash flow.
- However, SCHD has a far superior track record on performance and dividend growth. Since 2016, it's beat DJD by 34.44% and delivered an impressive 16.19% dividend CAGR.
- SCHD has also raised dividends for 11 straight years, eighth-best in a pool of 850 U.S. Equity ETFs. Meanwhile, DJD's dividend declined in 2021, ending its two-year streak.
- I've previously asked readers to temper short-term expectations for SCHD based on weak earnings growth rates. However, DJD barely breaks even on this metric, and only seems suitable for when growth completely falls out of favor.
- This article also addresses an argument that SCHD is overhyped. Essentially, analysts using hype as a basis to avoid SCHD misunderstand how ETFs operate, and I'll provide several price and technical metrics to demonstrate why hype is not a concern in this case.
Article Purpose
The purpose of this article is to evaluate the Schwab U.S. Dividend Equity ETF ( SCHD ) and the Invesco Dow Jones Industrial Average Dividend ETF ( DJD ), two high-yielding dividend ETFs that have put up similar returns over the last two years. While it's well-known that SCHD has the edge on total returns, readers might not be aware that DJD has a disastrous estimated earnings growth rate. Furthermore, DJD doesn't offer any meaningful valuation advantage over SCHD, and its constituents have grown dividends by 4% less per year over the last five years. These and many other statistics are highlighted in this data-driven article, showing that while SCHD may not be the best ETF to own right now, DJD is far inferior. I look forward to explaining why in further detail below.
Strategy Comparison
SCHD tracks the Dow Jones U.S. Dividend 100 Index, selecting 100 U.S. securities (excluding REITs) that have paid dividends for ten consecutive years, have a minimum $500 million float-adjusted market cap, and have a minimum $2 million three-month average trading volume. Securities passing these initial screens are ranked by dividend yield, with the top half qualifying for the next step. Then, securities are ranked equally by four fundamental factors to create a composite score, as follows:
- free cash flow to total debt
- return on equity
- indicated dividend yield
- five-year dividend growth
One hundred securities qualify, but a buffer rule allows a current member to remain as long as they fall within the top 200. Without knowing SCHD's top holdings, you can tell it's a high-quality fund. We have a reasonably selective group of stocks with high free cash flow and return on equity characteristics with a history of growing dividends. My main concern is that only 100 stocks are held, but expanding this would negatively impact dividend yield. Evidently, the Index tries to strike a balance between providing enough income without sacrificing quality, and based on my analysis, it's done this impressively. More on that later.
DJD's strategy is much simpler. The ETF tracks the Dow Jones Industrial Average Yield Weighted Index, selecting the dividend-paying stocks in the parent Index and weighting them by their trailing twelve-month dividend yields. Since dividend yield and price are inversely correlated, the result is a fund that trades at a low valuation. To illustrate, when I covered DJD in January , the ETF traded at 15.47x forward earnings compared to 19.45x for the SPDR Dow Jones Industrial Average ETF ( DIA ).
Sector Exposures and Top Holdings
The following table highlights sector exposure differences for SCHD and DJD. I've also included DIA in the table as a benchmark so we can easily see a different weighting scheme's impact on Dow stocks. As expected, there's a lean toward safer, lower-volatility stocks in the Consumer Staples at the expense of more volatile Consumer Discretionary stocks. There's also 8% less in Financials, which tend to be slightly more volatile than the broader market.
Like DJD, SCHD has no exposure to Real Estate stocks and only minimal to Utilities. In addition, no sector's allocation is above 20%, but its 10.08% weighting to Energy stocks is notable. Chevron ( CVX ) was a key addition in March and has gained momentum recently, with oil prices topping $90 per barrel for the first time since November 2022.
SCHD's top ten holdings are listed below, totaling 40.77% of the portfolio. As shown, it's a reasonably concentrated fund, with Amgen ( AMGN ), Cisco Systems ( CSCO ), AbbVie ( ABBV ), Broadcom ( AVGO ), Home Depot ( HD ), and Chevron all with weights above 4%.
DJD has a different type of concentration issue due to its weighting scheme. However, since it only holds 27 stocks, its top ten totals 59.64%, making it less diversified than SCHD. There's some overlap, notably with Verizon Communications ( VZ ), Chevron, and Coca-Cola ( KO ). However, total overlap by weight is minimal at 30.28%.
Performance and Dividends
Below is a table comparing annual, average, and total returns (assuming reinvested dividends) for SCHD and DJD, with the source link found here . SCHD's average return was 2.43% better and outperformed by 34.44% from January 1, 2016, until September 15, 2023.
The Sunday Investor / Portfolio Visualizer
Notably, DJD outperformed in 2018 and 2022, two years when the market declined. However, it needed more to make up for the underperformance in years when the market rose. Dividend investors are sometimes happy to accept this tradeoff if it results in more significant income, but as the chart below shows, that has yet to be the case. For an investor buying $10,000 each of the two funds and reinvesting all dividends, SCHD's portfolio income grew from $330 to $812 between 2016-2022, or 16.19% annualized over six years. DJD's increased from $279 to $641, or 14.87% annualized.
SCHD also has a better Seeking Alpha Dividend Grade. As shown below, it's raised dividends for 11 consecutive years, eighth-best among 850+ U.S. Equity ETFs I track behind XLV, SPY, XLU, XLF, VTV, IJJ, and VYM. Finally, its 3.53% trailing dividend yield is slightly above DJD's 3.49%, so from an income and dividend growth perspective, there's no area where DJD comes out ahead.
Fundamental Analysis
SCHD Fundamentals By Company
The following table highlights selected fundamental metrics for SCHD's top 25 holdings, totaling 79.33% of the portfolio. As alluded to earlier, it's a high-quality fund, as nearly all top holdings have "A+" Seeking Alpha Profitability Grades, which I've normalized on a ten-point scale. SCHD's overall grade is 9.48/10 compared to 9.14/10 for DJD.
A few additional observations:
1. SCHD's constituents yield 3.72%, or 3.66%, after deducting the fund's 0.06% expense ratio. Unlike the yield-weighted DJD, SCHD's top holdings drive down the fund's yield. All the top nine have below-average yields, with popular high-yielders Verizon Communications, Pfizer ( PFE ), and Altria Group ( MO ) further down the list. This composition is favorable because it's not too contrarian. High-yield investors should be cautious about falling into yield traps, but fortunately, there aren't too many that would have a material impact on performance.
2. SCHD's constituents have grown dividends by 10.64% per year over the last five years. The growth is widespread, with Amgen, AbbVie, Home Depot, Texas Instruments ( TXN ), and United Parcel Service ( UPS ) each recording double-digit growth. However, consider their low-single-digit or negative estimated earnings per share growth over the next year. It's unreasonable to expect double-digit dividend growth to continue, nor should dividend investors even want that, as it would bleed into share prices. As a whole, SCHD's estimated earnings per share growth rate is only 4.48%, and this is why, in prior articles, I've asked readers to temper short-term expectations.
3. SCHD has favorable valuation characteristics: 17.00x forward earnings and 13.73x trailing cash flow. As a reference, the SPDR S&P 500 ETF ( SPY ) trades at 26.06x forward earnings and 22.10x trailing cash flow on a weighted average basis, or about 35-40% more expensive. The main difference is that you miss out on substantial growth opportunities presented by stocks like Nvidia ( NVDA ) and Tesla ( TSLA ) and even some Health Care names like Eli Lilly ( LLY ). Due to their low dividend yields, these stocks were screened out quickly, as they don't fall within the top 50% by yield.
DJD Fundamentals By Company
The following table presents the same fundamentals for DJD's top 25 holdings, totaling 98.44% of the portfolio. Notice the downward progression by dividend yield from stocks #1-25, reflecting the Index's weighting scheme, as opposed to SCHD's favoritism for larger companies. Walgreens Boots Alliance ( WBA ) and Verizon Communications yield 8.56% and 7.87% compared to only 1.41% and 0.82% for Nike ( NKE ) and Microsoft ( MSFT ). Visa ( V ) and Apple (AAPL) have weightings below 1%, yielding only 0.75% and 0.55%.
One factor that stands out is DJD's 0.82 five-year beta, which almost places it in the same category as a low-volatility ETF. For reference, ETFs like SPLV, USMV, SPMV, and FDLO are at 0.68, 0.72, 0.76, and 0.81, respectively. However, DJD outperformed them all when SPY declined by 18.18%.
While nearly all DJD's holdings have perfect 10/10 Profit Scores, Walgreens Boots Alliance's 4.62/10 ("C" Grade) drives the overall score down. In addition to various legal issues, the company's CEO and CFO stepping down, and lower earnings guidance, EBIT margins are barely breaking even, and the entire fundamental picture seems to be worsening.
I've criticized SCHD's weak estimated sales and earnings growth several times over the last year, but DJD's is worse at 3.33% and 0.78%. Like with SCHD, this won't support any meaningful dividend growth moving forward unless management does so to appease its shareholders at the expense of its share price. Finally, consider some of the additional dividend-related metrics in the table below. In particular, DJD's payout ratio is almost 9% higher than its four-year average (54.57% vs. 45.65%), whereas SCHD's is only 1.49% more (54.35% vs. 51.86%).
DJD also has a lower Seeking Alpha Dividend Safety Score (7.13/10 vs. 7.33), and once again, the problem is at the top, with the top six all below average. As stated earlier, DJD is only suited for contrarian investors. The most influential stocks don't have high yields because they've grown dividends quickly. They are high-yielders because of substantial price depreciation, with WBA, VZ, and MMM falling 68.10%, 38.06%, and 51.39% over the last five years.
Is SCHD Too Hyped?
One counterpoint I've seen more frequently lately is that SCHD is too hyped, and investors should sell now and look into more under-the-radar ETFs like DJD. This irrational argument demonstrates a lack of understanding of how ETFs work. ETFs are open-ended investment vehicles that trade almost always near their net asset values. In contrast, CEFs often trade at significant discounts or premiums to NAV, and market sentiment (i.e., hype) can significantly impact returns.
SCHD is overhyped only if its underlying holdings are overhyped, as they drive the fund's returns. Unfortunately, these arguments are not made, with analysts instead focusing on SCHD's success over the last few years in terms of asset under management growth. Technical analysis may be used, but not how most analysts use it. The research I've seen zeros in on short- and long-term price movements for the ETF itself and not the current holdings, which is what matters. To fill this void, I ask technical analysts to consider these weighted statistics for SCHD's current portfolio compared to SPY:
- 1M Price Return: -0.06% vs. 0.53%
- 6M Price Return: 4.96% vs.. 18.29%
- YTD Price Return: 0.50% vs. 27.33%
- 1Y Price Return: 6.23% vs. 24.58%
- 3Y Price Return: 41.84% vs. 56.74%
- 3Y Total Return: 57.13% vs. 63.82%
- 5Y Price Return: 39.99% vs. 128.94%
- 5Y Total Return: 65.81% vs. 142.59%
- 10Y Price Return: 211.81% vs. 797.68%
- 10Y Total Return: 322.99% vs. 892.10%
- Price vs. 10D SMA: -0.30% vs. -0.53%
- Price vs. 50D SMA: -0.75% vs. -0.50%
- Price vs. 100D SMA: 1.39% vs. 2.54%
- Price vs. 200D SMA: 0.34% vs. 8.44%
- Seeking Alpha Momentum Score: 5.95/10 vs. 7.91/10
Are these metrics reflective of an overhyped portfolio? Of course not, as almost all substantially trail SPY. But these statistics won't match what you find for SCHD "the ETF" because of portfolio turnover, and that's by design. The ETF rotates out of lower-yielding, high-performing stocks each year, which is what you'd expect of a value fund. Again, an argument that SCHD, or any ETF for that matter, is overhyped should include a discussion about why top holdings like Amgen, Cisco Systems, and AbbVie are overhyped. Absent that, I urge readers to reject these arguments and focus on what SCHD holds today. It's not my favorite ETF right now due to its constituents' weak growth rates. However, that doesn't make it a poor long-term hold, and based on its high quality, I have no reason to believe it won't succeed over the long run.
Investment Recommendation
I strongly recommend investors choose SCHD over DJD. SCHD has a solid 3.53% trailing dividend yield (3.66% expected) and is one of only a handful of ETFs to raise dividends for 10+ years. It also has a superior Profit Score (9.48/10 vs. 9.14/10), a stronger estimated earnings per share growth rate (4.48% vs. 0.78%), and is better diversified with proven dividend growers. In contrast, DJD is a contrarian play that only offers a marginally better expected dividend yield of 4.08%, an advantage that likely won't exist for those planning on holding it for the medium-to-long term. In short, keep SCHD but sell DJD. I hope you found this information helpful, and as always, I look forward to any discussion in the comments section below.
For further details see:
SCHD Vs. DJD: 2 High-Yield Dividend ETFs, One Clear Winner, Zero Hype Concerns