Why SCHD ETF's Recent Performance Justifies a Strategic Buy for Long-Term Passive Income

In an era of economic uncertainty and persistent low interest rates, investors seeking reliable passive income are increasingly turning to dividend-focused strategies. The Schwab U.S. Dividend Equity ETF (SCHD) has emerged as a standout option, combining a compelling yield, robust dividend sustainability, and defensive positioning to weather market volatility. For income-focused investors, SCHD's recent performance and structural advantages make it a strategic buy for long-term portfolios.

Dividend Sustainability: The Bedrock of Income Reliability

SCHD's appeal begins with its focus on companies with a proven track record of dividend growth. The ETF tracks the Dow Jones U.S. Dividend 100 Index, which includes firms like ConocoPhillips, Altria, and AbbVie—companies that have consistently raised dividends for decades. These holdings are selected based on rigorous criteria: at least 10 years of uninterrupted dividend payments, strong cash flow to debt ratios, and a history of earnings growth.

Consider ConocoPhillips, a top 10 holding in SCHD. With a payout ratio of 45% and $18 billion in free cash flow (2025), the company retains ample flexibility to maintain and grow its dividend even amid oil price fluctuations. Similarly, Altria, another key component, operates with a 90% payout ratio but generates $6 billion in free cash flow, supported by its dominant position in the nicotine market. These metrics underscore the ETF's emphasis on “Dividend Kings” and “Aristocrats”—companies that balance shareholder returns with reinvestment in growth.

The ETF's sector allocations further reinforce sustainability. Energy, healthcare, and consumer staples—industries with stable cash flows and resilient demand—comprise a significant portion of the portfolio. These sectors are less prone to cyclical downturns, ensuring that dividend payouts remain predictable even during economic stress.

Yield Outperformance: A Competitive Edge in a Low-Yield World

SCHD's current yield of 3.87% as of July 2025 outpaces the S&P 500's 1.3% and rivals like the Fidelity High Dividend Yield ETF (FDVV, 3.16%) and Vanguard High Dividend Yield ETF (VYM, 2.65%). This outperformance is not a short-term anomaly but a result of the ETF's disciplined strategy. By prioritizing companies with strong balance sheets and consistent earnings, SCHD avoids the “value traps” of high-yield but financially fragile firms.

For example, AbbVie, a 3.35% yielder, has maintained its dividend for over 50 years despite a challenging post-Humira transition. Its free cash flow of $17.8 billion (2024) and a diversified pipeline in oncology and immunology provide a buffer against sector-specific risks. Meanwhile, Coca-Cola's 75% payout ratio is supported by $9 billion in annual free cash flow, ensuring its dividend remains secure even as global beverage markets evolve.

This yield advantage is amplified by SCHD's low expense ratio and tax efficiency, making it a cost-effective vehicle for compounding income. Over the past decade, the ETF has delivered a 11.18% annualized return, outpacing the S&P 500 and generating consistent dividend growth.

Market Volatility Positioning: A Shield Against Downturns

SCHD's defensive characteristics make it an ideal hedge against market volatility. With a beta of 0.88 relative to the S&P 500, the ETF is less volatile than the broader market. Its 20-day volatility of 12.76% and 200-day volatility of 21.56% place it among the least turbulent dividend ETFs. This stability is achieved through heavy allocations to large-cap stocks (92% of assets) and a focus on companies with strong free cash flow and low leverage.

During the 2019–2020 downturn, SCHD fell 21.55%—in line with the S&P 500's 34% decline—but its defensive sector weights and high-quality holdings limited losses compared to more cyclical ETFs. The fund's top 10 holdings, which account for 40.64% of assets, include utilities, healthcare, and consumer staples—sectors historically less impacted by recessions.

Moreover, the ETF's concentration in dividend growers (companies that have increased payouts for 25+ years) ensures that even during downturns, income streams remain intact. For instance, Lockheed Martin's 30% payout ratio and $7 billion in free cash flow allow it to sustain dividends through defense budget fluctuations, while Verizon's 70% payout ratio is supported by $10 billion in annual free cash flow.

Investment Implications: A Strategic Buy for Income Seekers

For investors prioritizing long-term passive income, SCHD offers a rare combination of yield, sustainability, and downside protection. Its focus on high-quality, low-volatility stocks positions it to outperform in both rising and falling markets, while its sector diversification reduces exposure to industry-specific shocks.

The ETF's recent performance—6.10% annualized return over the past year and 12.88% over five years—demonstrates its ability to balance income with growth. For those seeking to build a resilient dividend portfolio, pairing SCHD with growth-oriented ETFs like FDVV (which includes tech stocks like Apple and Nvidia) can create a “dividend and growth” portfolio that capitalizes on both income and capital appreciation.

However, investors should monitor macroeconomic risks, such as rising interest rates, which could pressure high-yield assets. That said, SCHD's structural advantages—strong cash flow generation, defensive sector allocations, and a history of dividend resilience—make it a compelling choice for investors with a 10+ year time horizon.

In conclusion, the Schwab U.S. Dividend Equity ETF is more than a passive income vehicle; it is a well-constructed, low-cost solution for investors seeking stability, growth, and consistent returns. As markets continue to grapple with uncertainty, SCHD's strategic positioning makes it a cornerstone for a diversified, income-focused portfolio.