Schwab's Dividend Playbook: Why SCHD Balances Income and Growth Better Than Covered-Call ETFs

The quest for steady income without sacrificing growth is a timeless challenge for investors. The Schwab U.S. Dividend Equity ETF (SCHD) has emerged as a standout solution, leveraging a meticulous selection process to deliver both dividends and long-term capital appreciation. While high-yield alternatives like SPYI and QQQI tempt with monthly payouts, their structural risks make SCHD a safer core holding for portfolios nearing retirement. Here's why.

SCHD's Secret Sauce: 10+ Years of Dividend Discipline

SCHD screens for companies that have increased dividends for at least 10 consecutive years, excluding REITs. This eliminates speculative firms prone to dividend cuts, focusing instead on financially robust stalwarts like Chevron (CVX) and Cisco (CSCO). The ETF then ranks candidates using a composite score of four metrics:
- Cash flow to total debt (assesses debt sustainability),
- Return on equity (measures profitability efficiency),
- Dividend yield, and
- 5-year dividend growth rate.

The top 100 scorers form the portfolio, weighted by market cap. This approach ensures a focus on companies with sustainable dividend growth and strong balance sheets.

Performance: Proven Resilience Over Time

SCHD's historical returns reflect its balanced design:
- 10-year annualized return: 10.58% (NAV) vs. 9.7% for the S&P 500.
- Dividend yield: A modest but reliable 3.9%, supported by a 12% average annual dividend growth rate since inception.

While SPYI and QQQI deliver double-digit yields (12.11% and 14.4%, respectively), their covered-call strategies come with trade-offs. By selling out-of-the-money call options, they cap upside potential: SPYI's 1-year return of 7.37% trails SCHD's 10.58% over the same period.

The Covered-Call Trade-Off: Income vs. Growth

SPYI and QQQI generate high yields by sacrificing capital appreciation:
1. Capped Upside: Their options strategies forfeit gains above the strike price. In a bull market, this drags performance.
2. Return of Capital (ROC): A 96%+ share of distributions for SPYI/qqqi is ROC, which reduces investors' cost basis and can erode net asset value (NAV) over time.
3. Sector Risk: QQQI's Nasdaq-100 focus (Apple, Nvidia) amplifies volatility, while SPYI's broader S&P 500 exposure still faces sector-specific headwinds.

Tax Efficiency: SCHD's Quiet Advantage

SCHD's dividends qualify for 20% long-term capital gains rates, whereas SPYI/qqqi's ROC components complicate tax planning. Over a decade, SCHD's Tax Cost Ratio averaged 1.02%, compared to SPYI's 1.53% over one year.

Why SCHD Wins for Retirement Portfolios

For investors within nine years of retirement, SCHD's blend of:
- Predictable dividends (no REIT volatility),
- Low fees (0.06% vs. 0.68% for SPYI/qqqi), and
- Proven resilience (outperforming in downturns like 2022)

makes it a safer core holding. While SPYI/qqqi can supplement income, their structural risks—NAV erosion, capped growth, and newer track records—demand caution.

A Pragmatic Strategy

• Core Position: Allocate 50-70% to SCHD for its balanced growth-income profile.
• Supplemental Income: Use 10-20% in SPYI/qqqi for high-yield “kicks,” but monitor ROC impacts closely.
• Avoid Overconcentration: Never rely solely on covered-call ETFs—they're best as tactical tools, not anchors.

Final Take

SCHD isn't flashy, but it's the Swiss Army knife of dividend ETFs—combining quality, diversification, and low costs. While high-yield alternatives like SPYI and QQQI offer allure, their trade-offs with capital appreciation and principal safety make them better for smaller allocations. For portfolios nearing retirement, SCHD remains the bedrock of steady growth and income.

Invest wisely—balance isn't about picking extremes, but building foundations that last.