Strategic Shifts: How a Focused Dividend Strategy Can Outperform in 2025's Volatile Markets
57min read The first five months of 2025 have tested investors, with the S&P 500 struggling to maintain momentum amid geopolitical tensions and shifting economic signals. Meanwhile, the Schwab U.S. Dividend Equity ETF (SCHD) has delivered modest gains, but opportunities for outperformance remain. This article explores a tactical alternative strategy designed to capitalize on market dynamics while addressing the limitations of both the broad market and SCHD’s dividend-focused approach.
The S&P 500: A Rocky Start to 2025
The S&P 500, a benchmark for U.S. equity performance, has faced headwinds this year. As of May 2, the index had declined by 3.31% from its December 31, 2024, closing level of 5,881.63 (see chart below). Volatility has been driven by concerns over trade disputes, Federal Reserve policy uncertainty, and uneven corporate earnings.
This underperformance highlights the risks of passive exposure to a broad market index in a low-growth environment.
SCHD: A Reliable Dividend Play, but Room for Improvement
The Schwab U.S. Dividend Equity ETF (SCHD) has fared better, but not decisively. As of March 31, 2025, its market price returned +3.26%, slightly outperforming the S&P 500 but trailing its benchmark, the Dow Jones U.S. Dividend 100 Index, by 0.01%. While SCHD’s focus on high-quality dividend payers has insulated it from the broader market’s declines, its narrow sector exposure—overweight in utilities and consumer staples—leaves it vulnerable to sector-specific headwinds.
The Alternative Strategy: A Dual-Factor Approach
To outperform both the S&P 500 and schd, investors should consider an ETF or portfolio combining dividend yield with sector diversification. This approach addresses two key limitations:
- Sector Overconcentration: SCHD’s heavy weighting in defensive sectors (utilities, consumer staples) may underperform in a recovery or rate-hike scenario.
- Growth Exposure: The S&P 500’s reliance on large-cap tech and financials has amplified its volatility.
A tactical alternative could include an ETF like the iShares Core Dividend Growth ETF (DGRO), which emphasizes companies with a history of dividend growth and a balanced sector allocation. As of March 31, DGRO had returned +4.1% YTD, outperforming both the S&P 500 and SCHD.
Why This Strategy Works in 2025
- Dividend Growth Over Yield: DGRO’s focus on companies with sustainable dividend growth (not just high yields) aligns with investor demand for quality over quantity.
- Sector Balance: DGRO’s exposure to healthcare (+7.5% YTD in 2025) and technology (+2.8% YTD) provides a buffer against sector-specific downturns.
- Lower Volatility: DGRO’s 12-month standard deviation (11.2%) is lower than SCHD’s (12.4%) and the S&P 500’s (14.1%), offering smoother returns.
Data-Driven Validation
- Yield vs. Growth: SCHD’s trailing yield of 2.9% is marginally higher than DGRO’s 2.6%, but DGRO’s +1.8% dividend growth rate since 2020 outpaces SCHD’s +1.4%.
- Tax Efficiency: Both ETFs have comparable expense ratios (SCHD: 0.06%; DGRO: 0.09%), but DGRO’s lower turnover (2%) reduces capital gains distributions.
- Risk-Adjusted Returns: DGRO’s Sharpe Ratio of 0.35 (vs. SCHD’s 0.28 and the S&P 500’s 0.18) underscores its superior risk-adjusted performance.
Conclusion: Prioritize Quality and Balance
In 2025’s volatile market, passive exposure to the S&P 500 or a single-sector dividend ETF like SCHD may leave returns unfulfilled. An alternative strategy blending dividend growth with balanced sector exposure—embodied by DGRO—offers a compelling middle ground. With +4.1% YTD returns through March 31 and a lower volatility profile, this approach positions investors to navigate uncertainty while capitalizing on companies with sustainable earnings and payout histories.
Investors should also monitor macroeconomic signals: if the Federal Reserve signals a pause in rate hikes or economic growth stabilizes, sectors like industrials and technology could further boost this strategy’s returns. For now, the evidence points to a clear path: dividend growth, not just yield, is key to outperforming in 2025.
