SCHD's 27% YTD Gain Masks Stalled Dividend Growth Amid Rate Pressures

Performance and Valuation

The Schwab U.S. Dividend Equity ETF (SCHD) has delivered a 27% year-to-date gain, pushing its share price near a 52-week high. This rally has compressed the fund's dividend yield to approximately 3.1%, close to historic lows. Despite the strong price performance, the underlying dividend growth has nearly stalled: in the first half of the year, the fund's dividend increased by only 0.08% year-over-year, which is below the current inflation rate.

SCHD continues to trade at a discount to the S&P 500, but the valuation gap has narrowed. The fund's sector composition has also shifted, reflecting changes in the market. These factors suggest that the fund's current valuation may not offer the same margin of safety as in previous years.

Dividend Growth and Yield on Cost

Since its launch in 2011, SCHD has built a strong track record of dividend growth, making it a popular choice for income-focused investors. A $10,000 investment made at inception now generates a higher annual yield on cost than any new dividend ETF purchase today. However, the recent slowdown in dividend growth is a notable shift. The 0.08% increase in the first half is a stark contrast to the fund's historical growth rates, which have averaged in the high single digits annually.

For investors considering new positions, the current yield of 3.1% is near a historic low, meaning that new capital will receive a lower income stream relative to the purchase price. The fund's dividend history shows consistent payments, but the growth trajectory has flattened.

Macroeconomic Pressures

Rising interest rates have made fixed-income investments more attractive relative to dividend-paying equities like SCHD. As Treasury yields climb, the opportunity cost of holding a 3.1% yielding stock increases. Additionally, inflation erodes the real value of dividend income, especially when growth is below the inflation rate.

US government policies have disrupted the traditional 60-40 balanced portfolio, leading some investors to adopt a riskier allocation that includes SCHD and growth-oriented ETFs like QQQ, alongside alternative assets such as bitcoin and gold. This shift reflects a search for yield and growth in a low-yield environment, but it also introduces higher volatility.

The 4% retirement withdrawal rule, established in 1994, was based on higher bond yields and shorter retirement periods. With current yields and inflation dynamics, that rule may be less effective today. Some investors are turning to specialized income ETFs, such as JPMorgan Nasdaq Equity Premium Income (JEPQ) and NEOS Nasdaq-100 High Income (QQQI), which offer higher yields but come with different risk profiles.

What it means for income investors

For income investors, SCHD's recent price appreciation has reduced its yield to near historic lows, while its dividend growth has slowed to a pace below inflation. This combination may limit the fund's ability to provide real income growth in the current environment. As interest rates remain elevated, fixed-income alternatives may offer more competitive yields, and investors should weigh these factors when considering new allocations.

Reporting based on: Pluang. Figures verified against market data where available.