My Favorites Things About SCHD

By | October 22, 2015

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Summary I love the low expense ratio, but that is no reason to hold an ETF in itself. The sector allocation is great for picking companies that will show up to work on creating dividends in both good and bad markets. The individual holdings may not be popular with investors at the present time, but I don’t need the company to be a source of conversation. I love seeing mature dividend paying companies that have fallen on weaker prices. I’m holding some shares of the Schwab U.S. Dividend Equity ETF (NYSEARCA: SCHD ) in my personal portfolio and it is one holding that I expect to keep adding to over the years. There are quite a few reasons to like this fund, but I want to highlight some of the things that really stand out to me. The fund has an expense ratio of .07%, which is absolutely outstanding. Even for a passive ETF that is great, but a poorly designed fund with a low expense ratio wouldn’t get me excited. The Sector Allocation At heart my major area for analysis is REITs and a great deal of that time is spent on mREITs. These are high yield holdings that can be fairly volatile and the last thing I want to do is combine high volatility in mREITs with high volatility in the rest of my portfolio. Therefore, I want to be overweighting sectors that are designed to survive weakness in the economic environment. SCHD delivers: (click to enlarge) The largest weighting is consumer staples. I love the sector because I want to own companies that provide the goods and services that are necessary in bad times as well as good. Share prices can get hammered in recessions, but I want to know that I have allocations to companies that won’t see their earnings get hammered as hard. Those companies are out there to earn money for the shareholders. Their purpose is to create earnings that can be used to pay dividends. I wouldn’t want an employee that only showed up to earn money for me on good days, so why would I want my portfolio allocated to companies that won’t show up with dividend payments when things get bad? Total return is a very important part of the picture, but don’t forget the importance of a solid dividend. Utilizing total returns means selling off shares, which is fine when the market is placing a high premium on companies. I just don’t want to ever be in a situation of having to sell off my shares when equity prices are falling. If you rely on the portfolio, what else are you able to do if dividends are cut? The Unpopular Kids I don’t have any need to have the cool stock in my portfolio. My portfolio is not in high school, it does not care about popularity. I’m perfectly happy to have the uncool stocks. If those uncool stocks are available at great prices, why wouldn’t I want them? Wal-Mart (NYSE: WMT ) is now “uncool”. Their stock has fallen from near $90 to under $60. Who wants to brag about owning Wal-Mart? They have ugly box-shaped stores and sell cheap products on thin margins. They do very little that is considered “exciting”, but their shares have been thoroughly punished since they announced a plan to raise wages for employees. This is a great example of an “uncool” stock, and I’m certainly happy to get some of it through my holdings in SCHD. Do you care, even a tiny bit, if their stores are ugly? I’m far more interested in their ability to grow EPS over the next two decades and how much money they can pay out in dividends while they do it. The company may see share prices struggle for a couple years as earnings will be depressed by the impact of wages , but my investing horizon is far longer than a few years. Wal-Mart serves as about 2.19% of the portfolio. That is just fine with me. Exxon Mobil (NYSE: XOM ) was previously a cool kid. They were huge and in the sexy oil industry. Well, perhaps it would be more accurate to call it the crude oil industry. With oil prices getting hammered, it seems no one wants Exxon Mobil anymore. Shares are down from $100 to about $80. Sure, there are problems with the oil industry such as weak pricing. How will Exxon Mobil survive? They may be uncool now, but they have experienced being uncool before. It seems unlikely to impact them in the long run. How long do you think oil will be incredibly cheap without Exxon Mobil finding a way to profit from the situation? Am I being too cynical in suggesting that big oil owns enough senators to fix whatever problems come up for the industry? Money in politics is here to stay and Exxon Mobil won’t be kicked to the curb anytime soon. The same can be said for Chevron Corp. (NYSE: CVX ). This is a longstanding oligopoly and I find it highly unlikely that either company will ever see a macroeconomic environment where they are unable to function. XOM may be classified as being “on sale”, but it would be fair to classify CVX as being in the clearance bin. They are down to $90 from over $130. These two companies combine to make up nearly 10% of the portfolio. 3M (NYSE: MMM ) is another classic stock for being “uncool”. The company produces more products than any investor would care to count. Walking around your house you see tons of them and probably don’t know how many of them can be traced back to 3M. If you don’t believe, just take a look at this: (click to enlarge) From the 3M website, a simple search for “tapes and adhesives” results in 2,494 matching products. Who wants to own a company that makes boring stuff like tape? No one is getting excited by the business, but this company has a great history of paying out increasing dividends and an extremely diversified product pool. They may not be a great source of conversation at a party, but they are a great source of dividends. 3M is 2.24% of the portfolio. The List The top holdings can be seen below: (click to enlarge) This list, from the Schwab website, shows a great collection of stocks that will rarely come up in discussion at any boring social event that you or I might attend. Is that a reason not to hold them? Too often new investors become focused on holding a company because they like something about it, but the thing they should be looking at is the valuation and the expected stream of future income. Conclusion I love this ETF. If an investor doesn’t hold it, they might as well use the list of holdings as a starting point for finding the next company that would fit in their portfolio. The expenses ratios are cheap and allocations are excellent for building a portfolio that is unlikely to just quit on us when the market gets tough. I want those dividends in the bad years even more than I want them in the good years, because the last thing I want to do is be forced to sell off my shares when prices are depressed. Scalper1 News

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