NYSEARCA:SCHD – Is Schwab U.S. Dividend Equity ETF the Best Dividend Growth Play for 2025?
Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) has become one of the most popular dividend ETFs among income-focused investors. With a 3.5% dividend yield, a 13% CAGR in dividend growth since 2018, and exposure to stable, high-quality companies, SCHD is an attractive investment for those seeking reliable income and capital appreciation. The current market environment, with elevated interest rates, high inflation, and uncertainty around growth stocks, presents a unique opportunity for SCHD to outperform.
Unlike the high-growth, tech-heavy S&P 500, SCHD focuses on established companies with strong balance sheets, consistent dividend growth, and solid fundamentals. While the ETF has underperformed over the last five years compared to SPDR S&P 500 ETF (SPY), historical data suggests that dividend growth stocks outperform over long periods—especially in bear markets. With the potential for a market rotation away from overvalued tech stocks, SCHD is well-positioned to deliver superior risk-adjusted returns over the next several years.
The Strength of NYSEARCA:SCHD's Portfolio – Defensive and High-Quality Holdings
SCHD follows a rules-based selection process that prioritizes high-yielding, dividend-growing companies with strong financials. The ETF's holdings are diversified across multiple sectors but have a defensive tilt that makes it particularly appealing in uncertain economic conditions. Unlike growth-heavy ETFs such as Vanguard Dividend Appreciation ETF (VIG) or Vanguard High Dividend Yield ETF (VYM), SCHD's allocation favors sectors that tend to perform well during economic downturns.
The top three sectors in SCHD are Industrials, Financials, and Healthcare, which together make up more than 50% of the portfolio. These industries historically provide steady earnings and are less volatile than technology-driven stocks. In contrast, VIG and VYM have higher exposure to Technology and Communication Services, sectors that could face headwinds as market conditions shift.
Moreover, SCHD's quality-based selection ensures that only financially stable companies make the cut. The fund screens for companies with at least 10 years of consecutive dividend growth, a minimum market cap of $500 million, and a 3-month average daily trading volume of at least $2 million. Once the initial screening is completed, the fund ranks eligible stocks based on free cash flow to debt ratio, return on equity, dividend yield, and five-year dividend growth rate. This process ensures that SCHD is heavily weighted toward companies with sustainable dividends and solid fundamentals, reducing risk while maintaining a strong yield.
Why NYSEARCA:SCHD's Dividend Growth Strategy Outshines Competitors
SCHD is designed to provide both a strong starting yield and substantial dividend growth, making it an excellent choice for investors looking to maximize long-term income. The ETF's 3.5% yield, combined with double-digit dividend growth, offers an ideal balance between income and appreciation. Since 2018, SCHD has achieved a dividend CAGR of 13.03%, far outpacing inflation and many other dividend ETFs.
For comparison, SCHD's five-year dividend growth rate of 11.59% is significantly higher than that of VYM (7.6%) and VIG (8.2%). This combination of a high yield and rapid growth makes SCHD an ideal choice for investors who want to build a strong income stream over time. The Chowder Rule, which adds the dividend yield to the five-year dividend growth rate, suggests that SCHD is one of the best dividend growth investments available, with a score of 15.09—well above the 12% threshold considered attractive for dividend investors.
The ETF's annual reconstitution in March helps it maintain a competitive yield and strong dividend growth. By consistently screening for high-yielding, high-quality dividend growers, SCHD effectively "refreshes" its holdings to maintain strong dividend growth, even if some companies in the portfolio experience temporary slowdowns.
NYSEARCA:SCHD's Performance – How It Stacks Up Against the Broader Market
While SCHD has lagged the S&P 500 over the last five years—returning 84.64% compared to SPY’s 105.87%—this short-term underperformance is misleading. The S&P 500’s gains have been heavily concentrated in a handful of mega-cap tech stocks, such as Nvidia, Apple, and Microsoft. These stocks have driven most of the market’s gains, creating an unbalanced and risky concentration.
SCHD’s long-term advantage lies in its stability and outperformance during market downturns. Historically, dividend growth stocks have beaten the S&P 500 during bear markets. Studies show that portfolios focused on dividend growth tend to have lower volatility and stronger risk-adjusted returns over extended periods.
Long-term data from the Dow Jones U.S. Broad Stock Market Index, which SCHD follows, indicates that dividend growth stocks outperform the broader market over decades. Backtests from 1999, 2002, and 2006 show that investing in dividend growth stocks generated higher total returns than the S&P 500. This aligns with research from Hartford Funds, which found that dividend growers outperform non-dividend-paying stocks over long periods.
A Market Rotation Could Propel SCHD Higher
SCHD may be poised to benefit from a market rotation away from high-growth tech stocks. The "Magnificent 7" stocks now account for 35.4% of the entire S&P 500 market cap, a staggering concentration that increases risk. Given that the tech sector has been responsible for most of the S&P 500’s gains, any shift in sentiment could trigger a significant reallocation toward dividend-focused investments.
Several catalysts could drive this shift:
- Higher for Longer Interest Rates – With inflation still elevated, the Federal Reserve is unlikely to cut rates aggressively. Higher rates make dividend stocks more attractive relative to high-growth tech stocks that rely on low borrowing costs.
- Market Concentration Risk – The extreme valuation of tech stocks increases the likelihood of a correction, leading investors to seek safer alternatives like SCHD.
- Inflation and Economic Uncertainty – Dividend growth stocks historically outperform during inflationary periods and economic downturns, making SCHD a strong hedge.
Potential Risks to NYSEARCA:SCHD's Bullish Case
While SCHD is one of the best dividend ETFs available, it is not without risks. One key factor to watch is economic policy under President Trump’s second term. His administration's focus on deregulation and corporate tax cuts could provide a tailwind for growth stocks, limiting SCHD’s relative appeal. However, if tariffs and trade wars increase inflationary pressures, SCHD’s defensive holdings could still benefit.
Another risk is energy price volatility. Lower oil and gas prices, driven by increased supply or geopolitical factors, could impact SCHD’s energy sector holdings. However, given SCHD’s broad sector diversification, this risk is mitigated.
Finally, technological breakthroughs could once again fuel growth stock momentum. The AI boom of 2023-2024 drove massive gains in tech stocks, and if another breakthrough occurs, SCHD could temporarily underperform. That said, its long-term stability and focus on high-quality companies make it an excellent choice for income-focused investors.
Final Take – Is NYSEARCA:SCHD a Buy?
SCHD remains one of the best dividend ETFs for long-term investors, offering an ideal mix of yield, dividend growth, and defensive sector exposure. Given the current macroeconomic landscape, SCHD is well-positioned to benefit from a shift away from overvalued tech stocks and toward stable, income-generating investments.
With a 3.5% yield, a 13% dividend growth rate, and a methodology that prioritizes quality companies, SCHD is a strong buy for those looking to generate passive income and protect against market volatility. Investors who want to track real-time performance can visit SCHD Live Stock Chart.
