In late 2025, the Schwab U.S. Dividend Equity ETF (SCHD) was highlighted as a promising choice for individuals seeking passive income. Unexpectedly, this exchange-traded fund experienced a substantial increase of close to 15% within the initial six weeks of 2026, dramatically outperforming the S&P 500's modest 1.3% rise during the same period. This article delves into the underlying reasons for SCHD's impressive ascent and articulates why it continues to be a compelling investment opportunity even after its recent gains, particularly for those prioritizing consistent income streams.
Investors are drawn to the Schwab U.S. Dividend Equity ETF primarily due to its attractive dividend yield, which currently stands at 3.5%, having exceeded 4% at various points in the previous year before its recent price appreciation. The fund offers a straightforward avenue for market participation while generating considerable income from a diverse portfolio of stocks. Furthermore, its remarkably low expense ratio of 0.06% translates to a mere $6 in fees for every $10,000 invested, making it an exceptionally cost-effective option. This yield significantly surpasses that of other popular low-cost ETFs; for instance, the Vanguard High Dividend Yield ETF offers a yield of only 2.3%.
Unlike some ETFs that boost their yields through a combination of stocks and bonds, or by employing covered call strategies that enhance income but limit capital appreciation, SCHD maintains a pure equity focus. Its high yield is achieved by strategically investing in sectors characterized by industry-leading companies committed to distributing profits to shareholders through dividends. A significant portion of the ETF, specifically 54.6%, is allocated to the energy, consumer staples, and healthcare sectors. These sectors are rich with companies known for their high-dividend payouts. In contrast, the S&P 500 dedicates only 17.6% of its portfolio to these three sectors, highlighting SCHD's distinct sectoral concentration.
Although SCHD has historically trailed the S&P 500 due to its lower exposure to high-growth sectors like technology and communications, which have been primary drivers of broader market gains in recent years, 2026 has seen a shift. The more established, traditional sectors have taken center stage, contributing significantly to SCHD's recent outperformance. For example, the energy sector, which constitutes 19.9% of SCHD's holdings, has markedly surpassed the S&P 500's performance in 2026. Consumer staples have also emerged as one of the top-performing sectors, while technology and communications have experienced minor setbacks.
Even with its recent upward trend, the Schwab U.S. Dividend Equity ETF presents several compelling reasons for continued investment. The fund predominantly invests in large-cap companies, with approximately 90% of its assets in firms valued at $15 billion or more. Furthermore, its largest holding, Lockheed Martin, accounts for a manageable 4.6% of the ETF, indicating a well-diversified portfolio across industry leaders rather than an over-reliance on a few individual stocks for growth. This strategy contrasts sharply with market-cap-weighted sector-specific ETFs, such as the Vanguard Energy ETF, which yields 2.8% but has 38.2% of its assets concentrated in just two companies, ExxonMobil and Chevron, potentially limiting diversification for some investors. Similarly, the Vanguard Consumer Staples ETF has 45.2% of its investments in only four companies: Walmart, Costco Wholesale, Procter & Gamble, and Coca-Cola.
In addition to its strong diversification, the Schwab U.S. Dividend Equity ETF remains attractively valued, trading at a price-to-earnings ratio below 20. Despite recent rallies in many energy and consumer staples stocks, a considerable number of them still maintain low valuations. The energy sector, including leading companies like ExxonMobil and Chevron, has historically traded at a discount compared to the S&P 500, a reflection of the inherent volatility in oil and gas prices and ongoing investor apprehension regarding the long-term prospects of fossil fuels in a global push towards lower carbon emissions. At the start of 2026, stocks such as Procter & Gamble and Coca-Cola were undervalued relative to their historical averages; they have since moved closer to those average valuations. The fundamental investment rationale for the Schwab U.S. Dividend Equity ETF has not wavered with the turn of the calendar. Instead, a segment of short-term-focused investors is reallocating capital from high-growth sectors to more stable, dividend-paying value sectors. Technology stocks are currently facing scrutiny as investors increasingly question capital expenditures and the ultimate returns from artificial intelligence (AI) investments. While some market participants may engage in short-term trading to capitalize on these shifts, a more prudent strategy for individual investors involves understanding the role high-yield dividend stocks can play in their portfolios, how they align with financial objectives, and their preferred investment approach. The Schwab U.S. Dividend Equity ETF possesses the characteristics to either serve as a foundational asset in a portfolio focused on passive income or to complement a diversified portfolio, making it a viable purchase at present.
