For many in the dividend investing community, the Schwab U.S. Dividend Equity ETF (SCHD) is a staple for steady income. Yet, there’s a vocal minority who question whether SCHD truly aligns with the principles of long-term wealth creation. Here’s an enriched perspective on why some investors might opt out of SCHD.
Firstly, SCHD’s high turnover rate is often a point of contention. The annual rebalancing can lead to selling off stocks that might have been beneficial to hold longer. This practice might seem like a prudent way to maintain the fund’s yield and quality standards, but from a growth perspective, it’s less than ideal. The sale of Microsoft (MSFT) in 2018 stands out as a move that could have cost investors substantial growth if held for a few more years.
The fund’s rebalancing also does not allow for the natural evolution of a portfolio where winners are allowed to ‘run’. In the context of long-term investing, this can be seen as a missed opportunity. When quality companies perform well, their contribution to the portfolio should ideally grow proportionally. SCHD’s methodology caps this potential, which might not sit well with investors who believe in the power of compounding through sustained holding.
From a broader perspective, building a portfolio one company at a time offers a level of customization that SCHD lacks. Investors can pick and choose based on their criteria for what constitutes a ‘good’ dividend stock, focusing on fundamentals like company stability, sector dominance, or even the sustainability of dividends. This granular approach can lead to a portfolio that’s not just about dividends but also about capital appreciation, something SCHD’s equal weighting might not facilitate as effectively.
Moreover, SCHD’s position weights can be a double-edged sword. While it ensures diversification, it also means that stellar performers are not given the chance to significantly influence the fund’s overall performance due to the cap on individual stock exposure. In contrast, an investor managing their own portfolio can overweight their winners, potentially leading to better returns if those companies continue to outperform.
Additionally, from a psychological standpoint, managing one’s portfolio can be more satisfying and educational. It encourages deeper research into each company’s prospects, industry trends, and macroeconomic factors, which can improve investment decision-making. SCHD, while offering convenience, might not provide this learning curve or the sense of control over one’s financial destiny.