Why the Schwab U.S. Dividend Equity ETF (SCHD) Is a Cornerstone for Income Investors in Volatile Markets

In a world where market volatility has become the norm, income-focused investors are increasingly drawn to strategies that blend stability with growth. The Schwab U.S. Dividend Equity ETF (SCHD) has emerged as a standout choice, offering a compelling mix of yield, defensive qualities, and a structured approach to dividend growth investing. While short-term underperformance in 2025 has raised eyebrows, a deeper look reveals why this ETF remains a compelling buy for those prioritizing steady income and long-term resilience.

The Defensive Edge: Dividends as a Shield in Stormy Markets

Dividend-paying stocks have long been a refuge for investors during market turbulence. SCHD's focus on companies with at least 10 consecutive years of dividend increases ensures it holds firms with proven financial discipline and stability. This criterion weeds out cyclical or speculative plays, instead favoring blue-chip names like Coca-Cola (KO), Home Depot (HD), and Cisco Systems (CSCO).

Consider its worst three-month return of -21.55% (December 2019–March 2020), which occurred during the height of the pandemic crash. Even in such extreme conditions, SCHD recovered strongly, delivering a best three-month return of +18.01% (January–April 2021). Its beta of 0.88 further underscores its lower volatility compared to the broader market. For income investors, this resilience is a key selling point.

The Yield Advantage: A 4% Payout in a Low-Yield World

With the S&P 500 yielding just 1.2% as of June 2025, SCHD's nearly 4% dividend yield stands out. This premium is achieved through a disciplined screening process that prioritizes companies with strong return on equity (ROE, averaging 25%) and low debt-to-equity ratios (0.5), ensuring financial health and sustainability of payouts.

The ETF's quarterly distributions, averaging $0.2488 per share in 2025, provide a reliable income stream. For retirees or conservative investors, this yield edge becomes even more valuable in an era of rising interest rates and economic uncertainty.

A Structured Methodology Backed by Decades of Data

SCHD tracks the Dow Jones U.S. Dividend 100 Index, which undergoes periodic reconstitution to ensure holdings meet evolving criteria. The March 2025 reconstitution, for instance, likely removed firms that cut dividends or fell below financial health thresholds while adding newer dividend growers. This dynamic process ensures the ETF remains a portfolio of high-quality, dividend-focused companies with an average ROE of 25% and a track record of outperforming peers over the long term.

The fund's top 10 holdings, accounting for 41% of assets, include industry leaders like Chevron (CVX) and Amgen (AMGN). While this concentration introduces some single-stock risk, it also reflects a deliberate tilt toward firms with proven dividend growth trajectories.

Addressing the Short-Term Slump: A Dip, Not a Decline

Critics may point to SCHD's -3.35% year-to-date (YTD) return through May 2025 or its -7.48% three-month performance as signs of weakness. However, these figures pale against its 10-year annualized return of 10.56%, outpacing the S&P 500's 10.5% and its own benchmark's 8.74%.

Short-term underperformance often reflects broader sector dynamics. For example, SCHD's 21% allocation to energy stocks may have weighed on returns during a period of oil price volatility. Yet this sector exposure also positions the ETF to benefit from rebounds in commodities—a risk worth taking for investors willing to look past near-term noise.

Cost Efficiency: A 0.06% Expense Ratio in an Expensive World

SCHD's rock-bottom expense ratio of 0.06% puts it in a league of its own. For every $10,000 invested, this translates to just $6 in annual fees, compared to the average ETF expense ratio of 0.40%. This cost advantage compounds over time, particularly for income-focused investors who prioritize maximizing returns after fees.

Sector Considerations and Diversification Tips

While SCHD's sector allocations—Energy (21%), Consumer Staples (19%), Healthcare (15%), and Industrials (13.5%)—offer broad diversification, they do lean toward defensive sectors. This is intentional but may leave investors underexposed to high-growth areas like technology or emerging markets. To balance this, consider pairing SCHD with:
- Technology ETFs (e.g., XLK or VGT) for exposure to growth stocks with rising dividends.
- International dividend ETFs (e.g., DVY or VIGI) to diversify beyond U.S. markets.

Risks to Consider

• Concentration Risk: The top 10 holdings represent nearly half the portfolio. If a major constituent underperforms, it could drag down returns.
• Dividend Cuts: While rare among SCHD's holdings, economic downturns could pressure even stable firms to reduce payouts.

Final Verdict: A Solid Buy for Income Investors

Despite its recent underperformance, SCHD's high yield, low cost, and proven track record of resilience make it a standout option for investors seeking stability and income. Its focus on dividend growers with strong balance sheets ensures it thrives in both bull and bear markets.

For those willing to look beyond short-term volatility, SCHD offers a compelling entry point—especially with its yield near 4% and expense ratio at rock-bottom levels. Pair it with complementary holdings to address sector biases, and you've built a portfolio primed to weather uncertainty while generating steady returns.

In a market where patience is a virtue, SCHD rewards investors who prioritize quality over flash.