SCHD's 2025 Underperformance: A Tactical $1,000 Entry Point?

The specific catalyst for re-evaluating the Schwab U.S. Dividend Equity ETF (SCHD) is its stark 2025 performance. While the broader market soared, SCHD returned only about 1%, a figure that significantly lagged the S&P 500's gain of over 17%. This underperformance creates a clear investment question for a $1,000 allocation: is this a temporary setback in a high-quality dividend strategy, or a sign of a more fundamental mispricing?

The core of the setup is a stark valuation gap. The average holding in SCHD trades at roughly 17 times earnings and yields 3.7%. This contrasts sharply with the S&P 500, which commands a multiple of more than 25 times earnings while offering a dividend yield of just 1.1%. In other words, investors are paying a premium for growth in the broader index while getting minimal income, whereas the dividend-focused portfolio trades at a discount with a much richer yield.

This divergence is particularly notable given the market's elevated multiples and record-low dividend yield. The S&P 500's valuation is well above its historical average, while its yield is near historic lows. SCHD's lower multiple and higher yield position it as a potential value play within the equity market, offering a different risk/reward profile. The event of 2025's underperformance, therefore, may have created a temporary mispricing that widens the gap between SCHD's current valuation and its historical norms.

The $1,000 Investment Context: Yield, Growth, and Cost

For a $1,000 allocation, the immediate math is straightforward. The Schwab U.S. Dividend Equity ETF (SCHD) offers a current yield of 3.7%. That translates to an annual income of $37, providing a tangible cash flow from day one. This yield is a key feature, especially when compared to the broader market, which trades at a much lower dividend yield.

Beyond the current payout, the fund's growth potential is compelling. At its last annual reconstitution, the average holding in the fund had increased its dividend by an 8.4% average annual rate over the past five years. This suggests the income stream itself is not static but is actively growing, which is critical for outpacing inflation and building wealth over time. The fund's strategy of selecting high-quality dividend growers aims to deliver both income and capital appreciation.

Cost efficiency further enhances the setup. The fund carries a 0.06% expense ratio, which is exceptionally low for an actively managed ETF. For a $1,000 investment, this keeps fees minimal, ensuring that nearly all of the income and growth potential flows directly to the investor. In a market where many funds charge more, this expense advantage is a material benefit.

The bottom line for a $1,000 investor is a low-cost, high-quality income stream with a proven track record of growth. The fund provides immediate yield, a growing payout, and operates with minimal friction, making it a disciplined core holding for income-focused capital.

The Peer Comparison: SCHD vs. VYM vs. DGRO

For investors seeking dividend income, the Schwab U.S. Dividend Equity ETF (SCHD), the Vanguard High Dividend Yield ETF (VYM), and the iShares Core Dividend Growth ETF (DGRO) represent three distinct approaches. A direct comparison reveals clear trade-offs between yield, cost, valuation, and growth orientation.

On the surface, SCHD and VYM are close competitors, both offering high yields and low expense ratios. SCHD yields 3.7% with an expense ratio of 0.06%. VYM offers a slightly lower yield of 3.4% but matches SCHD's low cost at 0.06%. DGRO, by contrast, takes a growth-focused path, targeting companies with a history of dividend increases. Its yield is significantly lower at 2.0%, and its expense ratio is higher at 0.15%. This structure means DGRO is less about immediate income and more about compounding that income over time.

Valuation further separates them. SCHD's holdings are anchored in quality, often large-cap, established firms. The average holding trades at about 17 times earnings, a reasonable multiple that reflects its stability. VYM's portfolio typically includes companies with a higher P/E, as it targets the highest-yielding stocks, which can sometimes be in more mature or cyclical sectors. DGRO's holdings are more growth-oriented, which commands a higher valuation multiple. This makes SCHD the most attractively valued of the three on a P/E basis.

The primary risk for SCHD is the market's momentum. Its recent underperformance-only up about 1% in 2025 versus the S&P 500's 17% gain-has pulled its valuation down. The risk is that if the broader market's momentum continues, the gap between SCHD's cheaper valuation and the market's premium will widen further before any re-rating occurs. This creates a potential opportunity for a catch-up rally, but only if the market's focus shifts from growth to value and quality. For now, SCHD offers the best combination of yield, low cost, and reasonable valuation, but its path to outperformance depends on a change in market sentiment.

The Tactical Setup: Reversion to the Mean vs. Persistent Outperformance

The immediate catalyst for SCHD is a classic reversion trade. After a brutal year where the fund gained just 1% in 2025, it now looks like a value proposition against a market trading at extreme valuations. The S&P 500 trades at more than 25 times earnings, a level well above its historical average, while SCHD's holdings average about 17 times earnings. This gap creates a tactical setup: the fund is positioned to benefit if the market's rich valuation corrects, pulling down the broader index while SCHD's higher-yielding, quality stocks hold up relatively better.

The historical returns provide a strong foundation for this bet. The fund has delivered an average annualized return of more than 10% in each of the past three-, five-, and 10-year periods. This performance aligns with the long-term track record of dividend growth stocks, which have returned about 10.2% annually over the past five decades. The argument is that after a poor year, SCHD is due for a reversion to its own robust historical mean.

The key watchpoint is the S&P 500's valuation peak. If the market's high multiple is confirmed as unsustainable, it could trigger a flight to quality and income, boosting demand for SCHD. Conversely, if the S&P 500's momentum persists, SCHD's underperformance could continue. The fund's strategy of holding the top 100 high-yielding dividend stocks with strong growth records provides a buffer, but it is not immune to broad market moves.

For a $1,000 investment, the risk/reward is skewed toward the upside given the valuation disconnect. The fund's historical returns and its focus on quality dividend growers offer a path to outperformance over the medium term. The clear recommendation is to allocate the $1,000 to SCHD as a tactical position. The exit signal is straightforward: if the S&P 500's valuation peak is confirmed and momentum persists, it would be prudent to reassess the position, as the reversion trade would have failed.