1. The Paradox of the “Safe” Dividend Play
For years, the Schwab U.S. Dividend Equity ETF (SCHD) has been the darling of conservative investors — a fortress for those who crave steady income and blue-chip reliability. Its formula seemed foolproof: focus on high-quality, dividend-paying companies with sustainable cash flows, low debt, and strong track records of rewarding shareholders.
But 2025 has not been kind to SCHD. The ETF, which once basked in investor affection for its resilience, has spent much of the year underperforming broader market indices. The very characteristics that made SCHD beloved in past downturns — discipline, defensiveness, and selectivity — have become liabilities in a market obsessed with growth, risk-taking, and artificial intelligence.
The result? A portfolio that looks wise on paper but sluggish in practice. SCHD is trudging along while the NASDAQ sprints. The “boring” dividend aristocrats are watching the “flashy” tech stars steal all the spotlight — and the returns.
2. The Changing Market Regime
To understand why SCHD is having a tough year, you have to understand the tectonic shifts happening in the market itself.
For the past 18 months, the narrative has been dominated by AI enthusiasm, interest rate pivots, and tech-driven productivity booms. Investors have rotated heavily into companies that promise explosive future growth — semiconductors, cloud computing, data centers, and AI infrastructure — while trimming exposure to slower-growth, cash-flow-heavy dividend names.
The S&P 500 has become increasingly top-heavy, with the “Magnificent Seven” stocks (Apple, Microsoft, Nvidia, Amazon, Alphabet, Meta, Tesla) accounting for nearly 30% of its total market cap. SCHD, meanwhile, doesn’t own any of them in meaningful size. Its top holdings are names like PepsiCo, Broadcom, Home Depot, and Amgen — stable, yes, but far from the rocket ships propelling this market higher.
In short: SCHD is a disciplined value investor in a growth investor’s market. And that discipline, while admirable, is costing it dearly.
3. The Interest Rate Overhang
The Federal Reserve hasn’t done dividend investors any favors either.
SCHD thrives when bond yields are moderate and inflation is under control. In such environments, dividends look attractive relative to Treasury yields. But with the 10-year yield hovering around 4.5%, that calculus changes. Why take equity risk for a 3.5% yield when you can earn similar or better returns in risk-free Treasury bills?
As a result, the classic “dividend premium” — the willingness of investors to pay extra for stable income — has evaporated. High-yield equity funds like SCHD are competing directly with money market funds and fixed income ETFs, and losing.
Every month, billions of dollars have flowed into short-term Treasuries and cash-equivalents while outflows from dividend-focused ETFs have accelerated. It’s not that SCHD’s underlying businesses are failing; it’s that investors no longer need to own them to earn yield.
4. Sector Composition: The Defensive Drag
SCHD’s sector composition — usually a source of stability — has been another drag this year.
Roughly 20–25% of its portfolio sits in industrials and financials, sectors that have struggled to gain traction amid interest rate volatility and a cooling consumer environment. Its exposure to technology, by contrast, is only around 12–14%, far lower than the S&P 500’s 30%+.
That’s a problem when technology is the only game in town.
While Nvidia adds hundreds of billions in market cap almost weekly, SCHD’s exposure is limited to old-guard tech like Cisco, Broadcom, and Texas Instruments — solid companies, but ones facing cyclical headwinds and slow earnings growth. Consumer staples, another SCHD mainstay, have also lagged as inflation pressures ease and pricing power wanes.
In essence, SCHD is loaded with the “safe and steady” names investors loved during the 2020–2022 uncertainty — but now the market wants excitement. The defensive plays are still paying dividends, but not producing alpha.
5. The Dividend Yield Trap
On paper, SCHD’s yield — currently hovering near 3.7%–4.0% — looks enticing. But yields can be deceptive.
A higher yield doesn’t always mean higher income; it can also signal that the underlying price has fallen. Indeed, that’s what’s happening now. The ETF’s yield is rising not because the dividends are skyrocketing, but because the price is sliding.
Even more troubling, some of the fund’s components have shown dividend growth fatigue. Many of the industrial and healthcare names that once raised payouts aggressively are now slowing those increases or holding steady to preserve cash. Meanwhile, inflation continues to nibble away at real purchasing power — meaning even a “high” nominal yield feels less satisfying in real terms.
Investors are realizing that income without growth isn’t enough in a market racing ahead on innovation and momentum.
6. The Rotation Out of Value
Every few years, the market swings its mood between “value” and “growth.”
SCHD’s strategy — rooted in fundamentals like strong free cash flow and return on equity — thrives when investors care about valuation discipline. But in 2025, valuation has taken a backseat to vision.
AI and automation narratives dominate headlines. The promise of exponential returns has eclipsed traditional measures of profitability. Investors are paying 40x earnings for hope, not 12x for consistency.
That shift has put SCHD at a relative disadvantage. Its portfolio is full of companies priced fairly — maybe even cheaply — but they lack the speculative sizzle Wall Street currently craves. The crowd has moved on to the next big thing, leaving dividend stalwarts sitting quietly in the corner, still doing their jobs, still printing cash, but ignored nonetheless.
7. Inflation’s Subtle Erosion
While inflation has cooled from its 2022 peaks, its lingering effects are still gnawing at dividend investors.
Corporate costs remain elevated — wages, energy, and input materials haven’t reverted to pre-pandemic norms. Many of SCHD’s holdings, particularly in manufacturing and consumer goods, face margin compression as they struggle to pass those costs on without losing market share.
The result: slower earnings growth, tighter payout ratios, and less room for dividend hikes.
At the same time, the real return on dividends has shrunk. A 4% yield might have been golden when inflation was 2%, but with real-world costs still climbing 3–3.5%, investors aren’t feeling richer. The purchasing power of dividend income has quietly eroded.
8. The “Growth Envy” Factor
There’s a psychological element at play too — call it “growth envy.”
Investors who once proudly held SCHD for its reliability now watch their friends brag about 60% gains in Nvidia or Super Micro Computer. The emotional tug of missing out on AI mania has prompted some to abandon their dividend discipline.
In the short term, this hurts funds like SCHD, which depend on investor loyalty and steady inflows. Even long-term dividend devotees are questioning whether they’re on the wrong side of history.
Ironically, that’s often when value quietly rebuilds its edge — but sentiment, not logic, dominates capital flows. And for now, sentiment says “growth or bust.”
9. The Performance Numbers Don’t Lie
The numbers tell the story clearly.
Through the third quarter of 2025, SCHD is down roughly 5–7% year-to-date, while the S&P 500 has gained over 12%. Its three-year annualized return has slipped below 7%, compared to the S&P’s double-digit pace.
Even its dividend reinvestment edge — long touted as a secret weapon — hasn’t saved it this time. Total return investors are finding that the compounding engine doesn’t kick in as powerfully when price momentum stalls.
It’s not catastrophic underperformance, but it’s noticeable. And in an age where investors can switch strategies at the tap of an app, patience for “temporary” laggards has worn thin.
10. The Fund’s Structure and Rebalancing Rules
One overlooked reason for SCHD’s slump is its methodology. The ETF tracks the Dow Jones U.S. Dividend 100 Index, which emphasizes dividend quality and sustainability metrics — return on equity, dividend growth history, and payout ratio — while excluding companies that don’t meet stringent screens.
That sounds prudent, but in practice it means SCHD can’t pivot quickly. It’s bound by its rules to hold stocks that meet the screen, even if they’re lagging, and can’t chase hot new entrants that lack a long dividend history.
For example, a rising star like Nvidia, which has only a token dividend, won’t qualify. Nor will most of the AI ecosystem firms driving 2025’s growth narrative. SCHD’s quarterly rebalances don’t move fast enough to capture shifting momentum trends, leaving it perpetually one step behind in rapidly evolving markets.
11. Dividends Are a Marathon, Not a Sprint
It’s worth remembering that SCHD was never designed to win every quarter. Its purpose is long-term wealth compounding through dividend growth and reinvestment. Over the past decade, it has delivered outstanding risk-adjusted returns, consistently beating many other dividend peers with lower volatility.
This year’s rough patch doesn’t invalidate that record — it contextualizes it.
Dividend investing is inherently cyclical. There will be years like 2025 when flashy growth names dominate and steady cash cows feel obsolete. But markets always revert. The same investors who flee income ETFs today may rediscover their appeal once the next correction punishes the overextended tech sector.
In other words, SCHD isn’t broken. It’s just temporarily out of sync with the market’s current obsession.
12. What’s Actually Inside SCHD
To understand where SCHD goes next, it helps to look under the hood.
As of mid-2025, the ETF’s top holdings include:
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Broadcom (AVGO) – a tech stalwart benefiting from AI demand but facing valuation compression after a monster 2023.
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PepsiCo (PEP) – consumer staple resilience, but modest growth and inflation headwinds.
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Home Depot (HD) – hit by slowing housing activity and high interest rates.
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Texas Instruments (TXN) – cyclical softness in semiconductors outside the AI boom.
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Amgen (AMGN) – steady dividend payer, but biotech pricing pressure remains an issue.
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Cisco (CSCO) – stable but stagnating, caught between hardware legacy and software transition.
There’s quality across the board — but not momentum. And in 2025, momentum is everything.
SCHD’s weighted average P/E ratio around 15x looks downright cheap compared to the S&P’s 23x, yet investors aren’t rushing in. It’s the paradox of value: being right too early still feels wrong.
13. Dividend Growth: The Silver Lining
Here’s where SCHD still shines: dividend growth resilience.
Despite price weakness, the underlying income stream continues to rise. Over the past five years, SCHD’s annual dividend per share has grown roughly 11% compounded. Even in 2025, amid headwinds, the payout is on track to increase again — albeit modestly.
That matters for long-term investors reinvesting distributions. Each quarter’s setback in price means reinvested dividends buy more shares, amplifying future compounding. It’s not glamorous, but it’s powerful over decades.
SCHD’s strength has always been sustainability. Unlike some high-yield ETFs that chase unstable payers, it prioritizes balance sheet health and payout consistency. That may not impress traders, but retirees and income-builders still appreciate it.
14. The Bigger Picture: Defensive Rotation Looming?
The irony is that SCHD’s toughest year may be setting the stage for its next great run.
Markets move in cycles of excess. When growth euphoria peaks, investors eventually remember fundamentals. If rates stay elevated or inflation re-accelerates, high-valuation tech names could correct sharply. When that happens, capital tends to rotate back into reliable earners — the very stocks SCHD owns.
In other words, SCHD’s pain today is tomorrow’s opportunity.
The setup looks similar to 2021–2022, when dividend ETFs lagged before roaring back as inflation spiked and speculative bubbles burst. If the next six months bring volatility — say, from geopolitical risk or a Fed misstep — SCHD’s steady cash flow could suddenly look a lot more attractive.
15. Investor Takeaways: Lessons from SCHD’s Struggles
There are three big takeaways from SCHD’s rough patch:
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Market cycles don’t invalidate sound strategy. SCHD’s underperformance reflects the market’s short-term mania, not a flaw in its design.
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Diversification matters. Even the best ETFs have off years. Holding SCHD alongside growth-oriented funds can smooth returns.
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Dividends are a mindset. They’re about long-term discipline, not instant gratification. This is precisely when compounding quietly does its best work.
Investors who panic-sell now risk doing what every generation of investors does — abandoning the slow, steady plan right before it rebounds.
16. What Could Turn It Around
For SCHD to regain momentum, several catalysts could help:
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A Federal Reserve rate cut cycle: Lower yields would make dividend stocks comparatively more attractive again.
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Market correction in growth stocks: A pullback in AI mania could drive investors back toward value and income.
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Earnings stabilization in staples and industrials: Improved margins could reignite dividend growth.
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Broader participation in the market rally: If leadership expands beyond the top seven tech names, SCHD will benefit.
None of these are guaranteed, but all are plausible within the next 12–18 months.
17. The Psychology of Patience
The hardest part of dividend investing is staying the course when everyone else seems to be getting rich faster.
Owning SCHD in 2025 feels like showing up to a Formula 1 race in a reliable Toyota. You’ll reach your destination — but not nearly as fast, and no one’s cheering for you. Yet that’s exactly the temperament dividend investing demands: patience, discipline, and a long horizon.
History shows that periods of underperformance are the price of admission for long-term compounding. SCHD’s tough year isn’t a reason to abandon ship — it’s a reminder of why most investors fail at long-term wealth building: they mistake boredom for failure.
18. The Case for Staying Invested
For those with 10- or 20-year horizons, SCHD remains one of the most compelling dividend ETFs on the market. Its expense ratio (0.06%) is ultra-low, its methodology is transparent, and its holdings are financially sound.
Periods like this — when sentiment turns sour and valuations compress — often prove to be the best entry points. Reinvested dividends at lower prices compound more effectively. If anything, SCHD’s current drawdown is a gift to disciplined investors.
It’s easy to love dividend stocks when they’re outperforming. The real test is loving them when they’re out of favor — because that’s when future outperformance quietly begins.
19. A Historical Perspective
Looking back, SCHD has weathered tougher storms before. It underperformed during the 2018 rate-hike cycle and during 2020’s early pandemic chaos — only to rebound strongly once markets rediscovered the value of reliable income.
Every correction eventually reminds investors that hype has limits and cash flow is king. Whether that reminder comes via an AI bubble, inflation flare-up, or policy shift, SCHD’s fundamentals are positioned to endure.
The ETF isn’t about timing perfection; it’s about owning a compounding machine that grinds steadily through cycles. Over a decade, that discipline has turned $10,000 into more than $28,000 with reinvested dividends — proof that boring can still be beautiful.
20. Conclusion: A Tough Year, Not a Bad Investment
So yes, SCHD is having a tough year. The headlines aren’t pretty, the comparisons are brutal, and the temptation to chase growth is real. But context matters.
SCHD is a workhorse, not a racehorse. Its current slump isn’t a failure — it’s a reflection of a market temporarily drunk on momentum. The same traits causing underperformance now — caution, quality, discipline — will be the very traits that shine when the party ends.
If the story of investing is a pendulum swinging between greed and fear, SCHD is the quiet metronome keeping time. It may be out of rhythm with 2025’s speculative beat, but when the music changes — and it always does — this ETF will still be standing, dividends in hand, compounding away in patient silence.