Why Paying SCHD’s Expense Ratio Is Worth It

Many investors balk at buying ETFs due to the expense ratio.  Some may ask why they should pay a company money to invest in the same companies that they can on their own?  Why not just buy the companies in the ETF instead of buying the fund?  While each investor has the option of doing just that, I suggest that you get a lot of benefits from paying a little for an ETF like the SCHD ETF.

SCHD is a very popular dividend ETF, and for good reason.  In my opinion it is the best all-around dividend ETF choice available.  Here is why paying SCHD’s expense ratio is worth it.

Overview of the Fund

Per the Fund’s website, the fund’s goal is to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Dividend 100™ Index.

The Schwab Strategic Trust – Schwab U.S. Dividend ETF (SCHD) started in October 2011 and currently has $46,784,398,947.70 in assets.

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Methodology

This is where the real value of the Fund comes into focus.  SCHD follows the Dow Jones U.S. Dividend 100 Index.  The methodology of this Index has produced superior returns and great income and income growth.

Per SP Global’s website, the Dow Jones U.S. Dividend 100 Index is designed to measure the performance of high-dividend-yielding stocks in the U.S. with a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios.

In order to be included in the index, the stocks must pass the following screens:

• Minimum 10 consecutive years of dividend payments
• Minimum market capitalization of US $500 million
• Minimum three-month average daily trading volume of US $2 million

The stocks that passed these screens are then ranked by yield and only the top half are eligible to be included in the index.

The stocks that meet the eligibility requirements are then ranked based on the following characteristics equally:

• Free cash flow to total debt
• Return on equity
• Expected forward yield
• Five-year dividend growth rate 

The 100 top-ranked stocks are selected to the index.

The index then reviews these holdings annually in March.  Additionally, no stock can represent more than 4% of the index and no sector can be over 25% of the index.  If the stock goes over these thresholds, the fund adjusts the holding size once a quarter. This is a great guardrail to make sure the fund is properly diversified and not overweight in any one sector or stock.  

SCHD is the only U.S. ETF that follows this Index so it is the only way to replicate this methodology.

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Returns

The methodology that the fund follows, along with concentrating on quality dividend growth companies has provided exceptional returns for investors.  Since 2011, the annual return has been 13.82%.  This is a fantastic performance that beats many individual stock returns as well as beats the S&P 500 during this time as well!

Here is a comparison with SPY, a popular S&P 500 fund:

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Dividend Profile

The dividend is variable depending on the holdings in the fund during the quarter and which holdings pay a dividend, but the current yield is approximately 3.32% and has a 5 year dividend growth rate of 13.74%.  The dividend is paid in March, June, September, and December.

If an investor has individual companies whose dividend profile is less than these figures it would be a benefit to invest in SCHD instead, without all the work of researching and maintaining the individual holdings.

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Holdings

As referenced above, the holdings of the fund are evaluated on an annual basis and the percentage of holdings is adjusted quarterly to ensure that no one stock gets too high as a percentage of the fund. 

As of today, here are the top holdings:

Symbol	Name	Percent of Assets (%)
VZ	VERIZON COMMUNICATIONS INC	4.40%
AVGO	BROADCOM INC	4.36%
HD	HOME DEPOT INC	4.04%
TXN	TEXAS INSTRUMENT INC	4.03%
MRK	MERCK & CO INC	3.99%
CSCO	CISCO SYSTEMS INC	3.97%
IBM	INTERNATIONAL BUSINESS MACHINES CO	3.87%
BLK	BLACKROCK INC	3.86%
KO	COCA-COLA	3.78%
PEP	PEPSICO INC	3.76%

These companies are top quality, well-known names that most dividend investors would be happy to own and most likely are in the portfolio of most individual company investors.

The benefit of using SCHD instead of buying all these separately is that you have to continually monitor the positions and adjust as needed.  SCHD will do that for you as companies ebb and flow with the market and economy.

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Expense Ratio

The expense ratio is 0.06%.  For what you get for the money, this is definitely worth it.

The cost to the investor is as follows:

Expenses per $10,000 investment

1 Year – $6.00

3 Years – $19.00

5 Years – $34.00

10 Years – $77.00

To get this quality approach to dividend investing for such a low price is a no brainer to me.  $77 per $10,000 over a 10 year period is minimal.

The time it would take an investor to do this type of research, analysis, and order placing would take hours each quarter.  If you value your time the same as you get paid in your employment, the time it would take would easily surpass the fee you pay for holding SCHD.  Let’s say you make $25 an hour and it takes you even four hours a year (which it would likely take much more), that is $100 worth of your time, each year.  SCHD charges $6 a year per $10,000 invested.

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Summary

SCHD is a top quality dividend ETF that has performed very well in the past 11 years and looks to continue to perform well going forward.  The methodology the fund follows, along with focusing on quality dividend companies who raise the dividends each year provide a solid foundation for any dividend portfolio. I have made SCHD my number one position, which you can read about here.

The historical capital appreciation, dividend yield and dividend growth provide a one-stop solution for a quality portfolio.
Don’t let the small fee charged by this ETF deter you.  Very likely the fund will outperform your individual stock holdings over time.  All this and you don’t have to spend the time doing the research.