Outperforming SCHD: A 4-Factor Dividend Growth Strategy with a 15.11% CAGR

In the ever-evolving landscape of dividend investing, the Schwab U.S. Dividend Equity ETF (SCHD) has long been a go-to option for income-focused investors. However, as markets shift toward growth-driven sectors like and renewable energy, SCHD’s static composition—anchored to traditional staples and industrials—has left it lagging behind more dynamic alternatives. Enter the , . This strategy not only mirrors SCHD’s focus on high-quality dividend payers but also integrates forward-looking metrics to capture growth and resilience in a volatile market.

The Limitations of SCHD

SCHD, which tracks the S&P U.S. , emphasizes companies with a history of increasing dividends over at least 10 years. While this approach has delivered steady income, it has struggled to keep pace with the broader market’s rally in 2025. According to a report by Seeking Alpha, , largely due to its limited exposure to high-growth tech stocks like NVIDIA and Amazon [2]. Additionally, , making it less attractive for income seekers [3].

The 4-Factor Strategy: A Dynamic Alternative

The 4-Factor Dividend Growth Strategy addresses these shortcomings by blending dividend sustainability with growth-oriented criteria. The strategy’s four core factors—, , (FCFE), and —are designed to identify companies that can maintain and grow dividends while adapting to macroeconomic shifts [4].

1. (DPR). For example, Apple (AAPL) and Microsoft (MSFT) maintain DPRs below 30%, allowing them to fund innovation while rewarding shareholders [5].
2. . , as it signals financial cushion. Johnson & Johnson (JNJ) and Coca-Cola (KO) consistently exceed this threshold [6].
3. (FCFE). Companies like Procter & Gamble (PG) and ExxonMobil (XOM) generate robust FCFE, enabling sustainable payouts [7].
4. . This metric filters out over-leveraged firms, prioritizing companies like PepsiCo (PEP) and Merck (MRK) [8].

By combining these factors with annual rebalancing and a growth tilt, , . This outperformance is attributed to its inclusion of tech and healthcare giants, which have driven market gains in 2025 [9].

Why This Strategy Works in 2025

The 4-Factor approach thrives in today’s market by addressing two critical trends:
- : Unlike SCHD, the strategy includes exposure to AI-driven tech stocks, which have surged in 2025. For instance, Microsoft’s dividend growth has accelerated as its cloud division expands [10].
- : Companies with strong FCFE and low debt (e.g., Coca-Cola) are better positioned to navigate inflationary pressures, ensuring dividend continuity [11].

Moreover, the strategy’s annual rebalancing allows it to adapt to sector rotations, whereas SCHD’s static index methodology lags [12]. This flexibility has been crucial in 2025, as investors pivot toward renewable energy and AI infrastructure.

Conclusion: A Compelling Case for Active Construction

While SCHD remains a solid choice for conservative income seekers, the 4-Factor Dividend Growth Strategy offers a superior alternative for investors seeking both income and growth. Its disciplined focus on financial health, combined with a forward-looking growth tilt, has delivered exceptional returns in a challenging market. As the economy continues to pivot toward innovation-driven sectors, this strategy exemplifies how active portfolio construction can outperform passive benchmarks.

For those willing to embrace a more tailored approach, the 4-Factor model underscores the power of combining dividend discipline with strategic agility—a recipe for outperforming even the most established dividend ETFs.

Source:
[1] SCHD ETF Alternative Strategy, CAGR Improves To 15.11% [https://seekingalpha.com/article/4819879-schd-etf-alternative-strategy-cagr-improves-to-15-11-percent]
[2] SCHD: Dividends Are Still A Losing Hand [https://seekingalpha.com/article/4796518-schd-dividends-are-still-a-losing-hand]
[3] Erosion of Dividend Yields in Inflation-Linked ETFs [https://www.ainvest.com/news/erosion-dividend-yields-inflation-linked-etfs-cautionary-trend-income-investors-2509/]
[4] 4 Ratios to Evaluate Dividend Stocks [https://www.investopedia.com/articles/markets/060116/4-ratios-evaluate-dividend-stocks.asp]
[5] Best Dividend Stocks for 2025: Top Picks for Steady Income and Growth [https://www.cheddarflow.com/blog/best-dividend-stocks-for-2025-top-picks-for-steady-income-and-growth/]
[6] High Quality Dividend Equity Strategy Targets Income and Growth Potential with Defensive Characteristics in Changing Markets [https://www.breckinridge.com/insights/details/high-quality-dividend-equity-strategy-targets-income-and-growth-potential-with-defensive-characteristics-in-changing-markets/]
[7] Dividend Growth Investing as A Long-Term Strategy [https://www.lenoxadvisors.com/insights/dividend-growth-investing-as-a-long-term-strategy/]
[8] In Phase or Out of Sync? Staying the Course in Dividend Growth [https://www.wisdomtree.com/investments/blog/2025/08/05/in-phase-or-out-of-sync-staying-the-course-in-dividend-growth]
[9] SCHD Alternative Strategy: Outperforming The S&P 500 And SCHD In 2025 [https://seekingalpha.com/article/4781449-schd-alternative-strategy-outperforming-the-s-and-p-500-and-schd-in-2025]
[10] The Surprising Truth About Dividend Growth Stocks [https://www.morningstar.com/stocks/surprising-truth-about-dividend-growth-stocks]
[11] Why Dividend Growth Oriented Portfolios for the Post-... [https://www.nuveen.com/global/insights/equities/why-dividend-growth]
[12] 4-Factor Dividend Growth Strategy - Started 2025 In High Gear [https://seekingalpha.com/article/4754926-4-factor-dividend-growth-strategy-started-2025-in-high-gear]