Stock Markets Analysis & Opinion

The Fatal Flaw In The World’s Most Popular Dividend ETF

“Brett, what do you think of SCHD?”

As soon as I heard the “C” I figured we were talking Schwab US Dividend Equity ETF (NYSE:SCHD). (Your income strategist can typically “name that dividend ticker” in two beats!)

“Eh,” I replied, struggling to string together a positive response to my AAII presentation attendee.

“SCHD owns some good names. A few,” I shrugged.

“It will generally keep you out of trouble.”

Safety is all the rage in 2022. Pain has been felt on ends of the stock-and-bond spectrum.

Stocks are down because the Federal Reserve is tightening. Bonds, meanwhile, are to balance the ship when stocks sink. They haven’t. Fixed income has been flogged, too, because rising interest rates have busted bond prices.

With bonds broken, vanilla investors are looking back at stocks and buying the safest stuff—like dividends. Did we call it or did we call it? In these pages on January 5, we looked ahead and shook our heads:

The 2022 edition of the stock market is going to be a mess. With the Federal Reserve pausing its money printing, we are likely to see “flights to safety” that will feature—believe it or not—.

Six months later, the dividend bandwagon is beginning to get crowded. Bloomberg notes that investors have an “income obsession” this year. They’ve put than they have other ETF this year.

Cute. Kinda smart. Better than a Bitcoin ETF, that is for sure!

SCHD owns 104 dividend stocks and PepsiCo (NASDAQ:PEP) is a top holding. PEP pays a piddly 2.6% but its yearly dividend growth is decent—not great but not AT&T (NYSE:T) awful, either. These raises are the stock’s sugary “dividend magnet” that drives its price higher:

Decent Dividend Growth from Sugar Water
PEP-Dividend Magnet

The 104-stock blend gives SCHD investors a 3.3% dividend. Again, not bad. But there’s a key ingredient missing from this ETF:

104 Dividend Stocks and Exxon Mobil?
SCHD-Top Holdings

We talk about Exxon Mobil (NYSE:XOM) often in this column because, well, it’s probably blue-chip dividend stock to own in the 2020s. After all:

  • It’s a bull market in oil.
  • It’s a bear market in everything else (with the exception of the US dollar.)
  • So how could we own energy dividend stocks?

Yet SCHD does , and its performance year-to-date has suffered as a result! While XOM has , SCHD has :

XOM-Total Returns 2022

Oil is and it produces to build clean energy infrastructure.

Someday, XOM’s current business model will be obsolete. Between now and then, the firm is going to make a boatload of money—and pay it to us!

The stock trades around $97 as I write. The company earned . Last

Annualize this number, and XOM has a P/E (price-to-earnings) ratio less than . annualize it, and we’re near 10. Either way, .

Quarterly revenue is up more than 40% year-over-year. EPS (earnings per share) has nearly tripled since last summer. Yet the stock yields 3.6% and trades impossibly cheap.

The “Crash ‘n Rally” party is just getting going. Soon, the vanilla crowd will begin scooping a healthy side of XOM. is the dividend flavor of the decade. If you already own it, well done. Enjoy!

Disclosure:

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