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Why You Should Consider Buying SCHD: A Buffett-Style High-Yield ETF Worth Investing In

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The Schwab U.S. Dividend Equity ETF™ (NYSEARCA:SCHD) is a highly acclaimed choice among income investors and is well-regarded on Seeking Alpha for good reason. However, not everyone shares the same enthusiasm for SCHD, with some expressing bearish sentiments towards it. In this article, we will debunk the top ten claims made by the bearish market and provide you with ten undeniable facts and reasons why SCHD is an ETF that you should consider adding to your portfolio without hesitation.

Fact One: Blue-Chip Stocks Outperform Cash in the Long Term

First and foremost, it is important to clarify that stocks are not an alternative to cash. While some may argue otherwise, historical data proves that cash delivers between 0% and 2% long-term real returns, whereas stocks have provided returns between 6% and 7% since 1800. In fact, $1 invested in US stocks in 1800 is worth $3.6 million today, while the equivalent amount invested in cash (T-bills) would only be $44.83. Therefore, it is clear that blue-chip stocks outperform cash in the long run, making SCHD an attractive investment option.

Fact Two: SCHD Is NOT a Bond Alternative

It is essential to recognize that no stock, including SCHD, can be considered a bond alternative unless the company has zero growth prospects. The truth is, bond income is taxed as ordinary income, while SCHD’s qualified dividends are treated as long-term capital gains, resulting in a more favorable tax treatment for SCHD investors. Furthermore, historical data since 2011 shows that SCHD has consistently outperformed cash, even factoring in inflation. Therefore, it is evident that SCHD’s income growth potential makes it a compelling investment choice that should not be dismissed or compared to bonds.

Fact Three: SCHD Is About Future Income Growth, Not Just the Yield Today

SCHD’s initial yield may be similar to its current yield, but its true value lies in its income growth potential over time. As data from 2012 to 2022 demonstrates, SCHD’s yield on cost increased from 3.8% to 13.8%, representing an annual income growth of 16% for those using dividend reinvestment. Even for retirees who rely on SCHD’s dividends for income, historical returns show that SCHD continues to outperform cash. Therefore, it is important to consider the future income growth potential of SCHD and not just its current yield.

Fact Four: SCHD Is Virtually Risk-Free in the Long Term

Buffett’s definition of risk is the probability of losing all your money. When it comes to SCHD, the risk of it becoming worthless is close to zero. SCHD’s top ten holdings, which represent 40% of the portfolio, are comprised of stable and reputable companies. The chances of all these companies going bankrupt and their stocks becoming worthless are extremely slim. In fact, the risk of nuclear war with Russia is higher than the risk of SCHD’s portfolio going to zero. Therefore, when compared to cash, SCHD can be considered virtually risk-free in the long term.

Fact Five: SCHD’s Dividends Are Not High Risk

SCHD’s dividend growth has been consistently positive, and there hasn’t been a single year in which SCHD’s dividend has declined. This is due to SCHD’s strategy, which focuses on safety, quality, and prudent valuation. By selecting high-yield dividend growth blue-chips based on various quality screens, SCHD ensures that its investors receive dependable and resilient dividend income. Therefore, SCHD’s dividends are not high risk, but rather a reliable and steady source of income.

Fact Seven: SCHD’s Dividends Have Better Tax Treatment

Compared to bond income, SCHD’s qualified dividends are treated as long-term capital gains and are taxed at a lower rate. For most Americans, SCHD’s dividends are taxed at 15%, which is considerably lower than the average American’s tax rate of 24.8%. This means that SCHD’s dividends provide better tax treatment and allow investors to keep more of their earnings.

Fact Eight: SCHD’s Dividend Income Risk Is Better Than Treasury Bills

SCHD’s dividend stability is far superior to that of Treasury bonds, which are almost guaranteed to yield less at some point in the future as interest rates are lowered. On the other hand, SCHD’s dividend has never been cut, and its stability remains intact. Therefore, when comparing SCHD’s dividend income risk to Treasury bills, SCHD comes out as the better option.

Fact Nine: SCHD’s Growth Outlook Is Better Than Ever

Historical data shows that SCHD has maintained a solid earnings growth rate of 9.6% from 2011 to 2022. Looking ahead, Morningstar analysts expect SCHD’s portfolio to have a 10.5% long-term earnings growth rate, surpassing the FactSet consensus for the S&P 500. Even conservative estimates show that SCHD will continue to deliver impressive growth rates that will likely outpace the market.

Fact Ten: Stocks Are Undervalued, and SCHD Is a Bargain Buy

Claims that SCHD is overvalued are not supported by the facts. In reality, SCHD is currently trading at a 25% historical discount to its market-determined fair value. Private equity firms are even paying a higher multiple for similar assets, making SCHD a compelling investment opportunity. FactSet consensus estimates suggest that SCHD has the potential to triple in the next decade, outperforming the market by a significant margin. Even with a modest growth rate, SCHD is likely to beat the market over the long term.

Bottom Line: SCHD Offers More Than Just a High Yield

SCHD is a highly regarded ETF for income investors due to its consistent performance and focus on quality and safety. Its track record of delivering top-tier post-tax returns and its reliable dividend growth make it a top choice among investors. Going forward, SCHD’s growth outlook remains strong, and it is projected to outperform the market by a wide margin. With its favorable tax treatment and low risk profile, SCHD is an ETF worth considering for long-term investors.

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