Dividend ETF Showdown: DIVO vs. SCHD in a Rising Rate World

In today's uncertain economic climate, where the Federal Reserve maintains its federal funds rate target at 4.25%–4.5%, income investors face a critical choice: prioritize yield, stability, or growth? Two popular dividend-focused ETFs—Amplify CWP Enhanced Dividend Income ETF (DIVO) and Schwab U.S. Dividend Equity ETF (SCHD)—offer distinct strategies to navigate this environment. Here's how they stack up.

The Macro Backdrop: Rates, Risks, and Dividends

The Federal Reserve's July 2025 decision to hold rates steady amid elevated core PCE inflation (3.1%) underscores the challenge for income investors. Rising rates typically pressure bond prices but can favor equities with sustainable dividends—provided companies can afford payouts amid slowing growth. This creates a high-stakes environment for dividend ETFs, which must balance yield with resilience.

DIVO: Active Management Meets Covered Calls

DIVO's strategy hinges on active sector rotation and covered call options, which generate extra income while capping downside risk. As of March 2025, its sector allocations reflected this approach:- Financials (27.45%): Overweight compared to the S&P 500, but with selective picks like JPMorgan Chase and Goldman Sachs to mitigate sector-specific risks.- Tech (17.13%): Underweight but anchored by dividend stalwarts like Microsoft and Salesforce.- Healthcare (8.09%): A rising contributor to returns, with UnitedHealth and Merck driving performance.

This diversification contrasts sharply with its passive counterpart. DIVO's 4.81% forward yield (as of 2025) outpaces SCHD's 3.97%, while its beta of 0.77 suggests 23% less volatility than the broader market. The fund's covered call strategy, covering 12% of holdings, further cushions investors against swings—critical in a Fed-hesitant environment.

SCHD: Quality Over Yield

SCHD tracks the Dow Jones U.S. Dividend 100 Index, focusing on high-yield, quality equities with long dividend histories. Its Q2 2025 rebalance reduced energy exposure (19.5%) and increased healthcare allocations, signaling a shift toward defensive sectors. Key holdings include Chevron, Merck, and Texas Instruments.

However, SCHD's reliance on passive indexing has trade-offs:- Yield Gap: Its 3.97% yield trails DIVO's 4.81%, and a 5.28% dividend cut in Q2 2025—though temporary—highlighted the risks of fixed indexation.- Sector Constraints: While SCHD's 0.06% expense ratio is a cost advantage, its broad diversification led to underperformance in sector-specific rallies. For example, utilities-focused ETFs like XLU outpaced SCHD by 10.5% in early 2025.

Risk-Adjusted Returns: Which ETF Wins?

The real test lies in risk-adjusted returns. DIVO's lower volatility (standard deviation of 2.00% vs. SCHD's 3.39%) and higher yield create a compelling case for income investors. Its March 2025 drawdown of -0.59% versus SCHD's -3.11% underscores this stability. Meanwhile, SCHD's dividend growth (6.4% year-to-date in 2025) and ultra-low fees make it a core holding for those seeking broad exposure.

Investment Takeaways

• Choose DIVO if you prioritize yield and downside protection. Its active management and covered calls deliver a 4.81% yield with 23% less volatility than the market. The fund's sector flexibility—evident in its Q1 2025 rebalancing—positions it well for Fed uncertainty.
• Opt for SCHD for low-cost, quality exposure. Its 11.5% average annual dividend growth since 2011 remains a strength, but investors should brace for occasional dips and recognize its lack of sector agility.

Final Verdict

In a rising rate environment, DIVO edges out SCHD for income investors seeking both yield and stability. While SCHD's historical reliability and cost efficiency are undeniable, its passive design leaves it vulnerable to sector headwinds. For those willing to trade a fraction of yield for superior risk management, DIVO's active strategy—and its 4.81% payout—offers a stronger value proposition in 2025.