Introduction to SCHD Portfolio Changes

The Schwab U.S. Dividend Equity ETF (SCHD) has undergone significant portfolio changes as part of its annual reconstitution in March 2025. These changes involve the removal and addition of several major stocks, impacting its sector exposure and dividend yield. The ETF tracks the Dow Jones U.S. Dividend 100 Index, focusing on high-dividend-yielding stocks with strong fundamentals. In this article, we'll explore these changes, their implications for dividend investors, and how they might impact your investment strategy in the context of dividend investing, dividend growth, and ETF management.

Overview of SCHD Reconstitution

SCHD is designed to capture the performance of the top 100 U.S. dividend-paying stocks based on criteria such as dividend yield, five-year dividend growth rate, return on equity, and cash flow to debt ratio. Every year, SCHD undergoes a reconstitution to refresh its portfolio and align with these criteria. This year, about 20% of the ETF's holdings were overhauled, with 17 stocks removed and several new ones added, bringing the total number of components from 97 to 117[5].

Notable Removals and Additions

Removed Stocks:

• Pfizer: Previously a top holding, Pfizer was removed, which significantly impacted the fund's dividend yield and income contribution[3].
• BlackRock: Another major stock removed, representing a notable shift in sector exposure[3].
• Dick's Sporting Goods: Though not a significant holding, its removal reflects changes in SCHD's sector alignment[3].

New Additions:

• General Mills: Known for its stable dividend payments, General Mills adds to the consumer staples sector[3].
• Archer Daniels Midland: Enhances the ETF's exposure to the food industry[3].
• Flowers Foods: Returns to the portfolio, contributing to the consumer staples sector[3].

Impact on Dividend Yield and Growth

Dividend Yield Changes

The removal of high-yielding stocks like Pfizer has reduced SCHD's overall dividend yield from 3.87% to 3.76%[1]. This decrease may impact the appeal of SCHD for investors seeking higher yields, especially in a low-interest-rate environment. However, the ETF still maintains a competitive yield compared to other dividend-focused ETFs.

Dividend Growth Prospects

While the portfolio changes might lead to slower dividend growth in 2025, SCHD's underlying dividend growth remains around 5% to 7% annually over the past decade[1]. This growth rate is influenced by the ETF's strategy of focusing on companies with a history of consistent dividend payments and growth.

Sector Exposure Shifts

New Sector Balance

The reconstitution has significantly altered SCHD's sector composition:

• Financials: Reduced from 17% to 9%, reflecting decreased reliance on this traditionally stable sector[1].
• Energy: Increased from 12% to 21%, exposing investors to more volatile but potentially higher-yielding stocks[1].
• Consumer Staples and Healthcare: Remain strong at over 30%, providing stability in uncertain markets[1].

This shift towards energy may increase volatility but also offers potential for higher returns in a rising commodity market.

Implications for Dividend Investors

Key Considerations:

• Dividend Safety: About 65% of SCHD's income comes from stocks rated as "safe" or "very safe," providing a stable foundation for long-term investors[1].
• Valuation: SCHD avoids the high valuations associated with big tech stocks, focusing on more reasonably priced dividend payers[1].

For investors relying on SCHD for steady income, the changes may require adjustments in expectations, particularly if the growth in payouts slows.

Conclusion

SCHD's recent portfolio changes offer both challenges and opportunities for dividend investors. While the shift towards more volatile sectors like energy and the reduction in dividend yield may concern some, SCHD remains a strong option for those seeking stable income through its focus on high-quality dividend stocks. As always, investors should consider their personal risk tolerance and investment goals when evaluating these changes.

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