Why I Don’t Get the Hype Around SCHD – Is There More to This ETF Than Just $1 in Dividends?

The Schwab US Dividend Equity ETF (NYSEARCA:SCHD | SCHD Price Prediction) is one of the most well-known dividend ETFs. It has produced a 45% return over the past five years and boasts a 3.75% SEC yield. It also has a 0.06% expense ratio, so investors get to keep almost all of the gains. 

It seems good on paper, but there are a few details that make me wonder why SCHD gets so much hype. It’s frequently praised in dividend subreddit posts, but its returns are lackluster compared to other options.

The Pandemic Bump Makes It Look More Attractive Than It Should

Most of the fund’s 45% gain over the past five years came in a small window in the back half of 2020. Many stocks soared during this time as the Federal Reserve pumped record-breaking money into the system and slashed interest rates. It was a pretty dramatic financial injection into the system, so almost every stock performed well during that stretch. 

However, SCHD only has an annualized 8.9% return over the past three years. It’s even worse that the fund only has a 2.8% return over the past year. This past year has been a good one for many ETFs, especially ones with exposure to AI stocks, so SCHD significantly lagged the stock market here.

Investors didn’t even have to take big risks to outperform SCHD. The S&P 500 delivered a 15.9% return over the past year and an annualized 14.7% return over the past five years. Both marks have comfortably outperformed SCHD.

A High Yield Doesn’t Mean The ETF Is A Good Pick

High yields look good on paper, but you end up losing a percentage of the yield to taxes. You will have to pay taxes on your dividend distributions at the long-term capital gains tax rate, assuming you hold your SCHD shares for more than a year. 

Some dividend stocks offer non-qualified cash distributions, which are taxed at less favorable ordinary income tax rates. Luckily for investors, SCHD prioritizes corporations that pay qualified dividends, but you’re still paying some money to the government each time you collect dividends.

Investors can generate higher returns with ETFs that don’t offer high yields. The S&P 500 and Nasdaq Composite — two popular benchmarks — have handily outperformed SCHD over many years. Investors can opt to sell shares of these ETFs when they need cash instead of relying on dividends and sacrificing higher long-term returns.

Limited Exposure To AI Stocks

Artificial intelligence is still in its early innings, and a portfolio that ignores these stocks can miss out on tremendous long-term returns. While some AI stocks are better than others, SCHD’s limited exposure to these stocks can limit upside.

Cisco (NASDAQ:CSCO), Texas Instruments (NASDAQ:TXN), and Verizon (NYSE:VZ) are the 7th, 8th, and 10th largest holdings in the fund. These are the only three AI stocks within the fund’s top 10 holdings, while other funds lead with AI-heavyweights like Nvidia (NASDAQ:NVDA) and Microsoft (NASDAQ:MSFT).

These mature companies don’t offer as much upside as high-growth AI companies like Nvidia, AMD (NASDAQ:AMD), and Broadcom (NASDAQ:AVGO). SCHD investors are missing out on what can be tremendous long-term returns by missing out on AI stocks.