SCHI’s $0.0921 Dividend Amid Shifting Bond Market Dynamics

The Schwab 5-10 Year Corporate Bond ETF (SCHI) recently declared a dividend of $0.0921 per share, marking a notable shift in its distribution history. This payout, while consistent with the ETF’s monthly dividend cadence, sits at the lower end of its historical range, reflecting broader challenges in the fixed-income market. Below, we analyze the implications of this dividend within the context of SCHI’s performance, bond market headwinds, and investor strategy.

Dividend Context: A Dip in Income

SCHI’s dividend of $0.0921, announced in late 2024, contrasts with its higher distributions in recent years. For example, in December 2023, the ETF paid $0.233 per share, and in June 2024, it distributed $0.2025. This drop aligns with a broader trend of reduced income across bond ETFs as rising interest rates compress bond prices and limit reinvestment opportunities.

The fund’s trailing 12-month yield has also declined, from 1.68% in early 2024 to an estimated 1.3% as of late 2024, underscoring the pressure on fixed-income investors.

Market Headwinds: Rate Risks and Inflation

The drop in dividends stems from two primary factors:
1. Fed Policy Uncertainty: The Federal Reserve’s prolonged pause on rate cuts has kept yields elevated. The 10-year Treasury yield approached 4.8% in early 2024, its highest in decades, squeezing returns on existing bonds.
2. Inflation Risks: Proposed fiscal policies—such as tariffs and tax cuts—have raised concerns about sustained inflation, limiting the Fed’s ability to ease rates. This environment pressures bond prices, particularly in the 5-10 year segment tracked by SCHI.

Corporate bond spreads—the extra yield over Treasuries—have compressed as investors prioritize safety, reducing SCHI’s income potential.

Advisor Insights: Equity Income Gains Favor

The data shows a clear shift in investor preferences:
- 59% of advisors now prioritize dividend-paying equities over bond strategies for income generation, citing higher yields and growth potential.
- Bond ETFs like SCHI face competition from actively managed alternatives such as the ALPS/SMITH Core Plus Bond ETF (SMTH), which offers higher starting yields (4.5–5.5%) and active duration management to mitigate rate risks.

SCHI’s Fundamentals: Low Costs, Broad Diversification

Despite the yield pressures, SCHI retains strengths:
- Expense Ratio: At 0.04%, it is among the cheapest bond ETFs, minimizing drag on returns.
- Index Tracking: The ETF holds ~90% of its assets in the Bloomberg US 5-10 Year Corporate Bond Index, ensuring broad exposure to investment-grade corporates.
- Historical Stability: Over five years, SCHI’s annualized return has averaged +5.2%, outperforming its category average.

Investment Considerations

1. Duration Risk: Investors should note SCHI’s average duration of ~6.5 years, making it sensitive to rate hikes. Shorter-duration bond ETFs may be preferable in a rising-rate environment.
2. Credit Quality: SCHI’s focus on investment-grade bonds reduces default risk, but inflation-driven credit downgrades remain a tailwind.
3. Portfolio Role: While its yield has fallen, SCHI still offers diversification benefits for equity-heavy portfolios. Pair it with defensive equities like the Schwab U.S. Dividend Equity ETF (SCHD) for balanced income.

Conclusion

The $0.0921 dividend from SCHI signals the challenges bond investors face in a high-rate environment. While its income has dipped, the ETF’s low costs and broad diversification justify its place in a diversified portfolio. However, investors seeking higher yields may want to pair SCHI with equity income strategies or shorter-duration bond funds.

As of late 2024, SCHI’s 5-year annualized return of +5.2% and its expense ratio of 0.04% remain compelling compared to actively managed bond funds charging 0.5–1.0%. Yet, with the 10-year Treasury yield near 5%, the path to meaningful income growth for bond ETFs remains narrow—underscoring the need for caution and diversification.

In short, SCHI remains a solid core holding for bond exposure but demands a long-term view in an environment where patience—and a diversified strategy—are key.