Investment Strategy2025-10-05
Dividend Stocks Continue to Outperform: SCHD ETF's Long-Term Investment Appeal in Focus
In a high-interest-rate environment, the dividend ETF SCHD is drawing attention for its defensive performance amid volatile markets while delivering stable dividend income. Use the rebalancing calculator to balance dividend and growth stocks, and the asset allocation calculator to pursue both income and growth simultaneously.
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As market volatility has expanded in October 2025, the dividend ETF SCHD (Schwab U.S. Dividend Equity ETF) has shown relatively resilient performance, attracting strong investor interest. Over the past month, while the S&P 500 rose 1.8%, SCHD gained 2.9%, slightly outperforming the broader market—and its smaller declines on down days highlighted its defensive strength. SCHD holds 100 high-quality dividend stocks selected for their dividend growth track records and financial soundness, with a dividend yield of 3.5%—more than double the market average of 1.5%. Dividend stocks are mature companies with stable cash flows that exhibit lower volatility during periods of economic uncertainty, and their dividend reinvestment enables powerful compounding for long-term investors. For those nearing retirement or prioritizing income investing, SCHD can serve as a core portfolio holding alongside VTI and QQQ. Use the rebalancing calculator to adjust your SCHD allocation based on your age and risk tolerance, and the asset allocation calculator to find the optimal combination of dividend income and capital gains.
SCHD Structure and Dividend Investing Principles
SCHD (Schwab U.S. Dividend Equity ETF) tracks the Dow Jones U.S. Dividend 100 Index and holds 100 U.S. large-cap stocks selected based on dividend growth and financial soundness. The stock selection criteria are as follows. First, a minimum of 10 consecutive years of dividend payments. Only companies with proven dividend consistency are included, ensuring reliability. Second, dividend growth rate. Companies that have steadily increased dividends over the past 10 years are favored, reflecting future dividend growth potential. Third, financial soundness. Metrics such as ROE, debt ratio, and cash flow are evaluated to verify dividend sustainability. The expense ratio is an extremely low 0.06%, with a dividend yield of 3.5% and an annual dividend growth rate of approximately 10%. The sector composition includes financials at 20%, industrials at 15%, healthcare at 14%, consumer discretionary at 13%, energy at 12%, technology at 10%, utilities at 8%, and consumer staples at 8%, providing broad diversification. Key holdings include BlackRock (asset management), Home Depot (retail), Verizon (telecommunications), Chevron (energy), Pfizer (pharmaceuticals), Cisco (networking), Texas Instruments (semiconductors), and PepsiCo (food and beverage)—representative companies from each sector. SCHD's advantages include: First, high dividends. The 3.5% dividend yield is more than double the S&P 500's 1.5%, with quarterly dividends providing regular income. With a 3.5% annual dividend alone, you can recover 35% of your principal in cash after 10 years. Second, dividend growth. The portfolio companies increase dividends by approximately 10% annually, delivering income growth that outpaces inflation. If dividends grow at 10% annually, the yield on your initial investment reaches 9% after 10 years. Third, low volatility. Dividend stocks are mature companies with smaller price fluctuations and strong defensive performance during downturns. When the S&P 500 fell -18% in 2022, SCHD dropped only -6%. Fourth, tax efficiency. Most U.S. dividends qualify as qualified dividends, which are taxed at a 15% dividend tax rate—lower than the maximum capital gains tax rate of 20%. Fifth, compounding effect. Reinvesting dividends grows your wealth through compounding, creating significant differences over the long term. Over 30 years, total returns with dividend reinvestment are more than double those without reinvestment. The disadvantages include: First, limited growth potential. Dividend stocks are mature companies with smaller price appreciation compared to growth stocks. SCHD's average annual return of 11% over the past 10 years fell short of QQQ's 17%. Second, sector concentration. High exposure to cyclical sectors like financials, energy, and utilities creates dividend cut risk during economic downturns. Third, foregone growth opportunities. Paying dividends means forgoing reinvestment opportunities, which is why high-growth companies like Amazon, Google, and Meta don't pay dividends and aren't included in SCHD. SCHD vs VTI vs QQQ comparison: VTI offers the broadest market diversification but has a low dividend yield of 1.5%. QQQ has the highest growth potential but virtually no dividends at 0.6% and high volatility. SCHD provides high income at 3.5% with low volatility but limited growth. The ideal combination is SCHD 25% + VTI 30% + QQQ 20% + bonds 25%, pursuing income, diversification, growth, and stability all at once. Enter this combination into the asset allocation calculator and simulate 20-year historical performance to see a well-balanced risk-return profile.
Dividend Reinvestment Strategy and Compounding Effect
The essence of dividend investing is reinvesting dividends to maximize the compounding effect. Dividend reinvestment (DRIP, Dividend Reinvestment Plan) automatically purchases shares of the same ETF with received dividends, increasing your share count. Compounding simulation: Assuming an initial investment of 100 million KRW, SCHD dividend yield of 3.5%, dividend growth rate of 10%, and annual price appreciation of 7%—after 10 years, reinvesting dividends yields 230 million KRW versus 190 million KRW without reinvestment, a difference of 40 million KRW. After 20 years, reinvestment reaches 520 million KRW versus 360 million KRW without, expanding the gap to 160 million KRW. After 30 years, reinvestment produces 1.1 billion KRW versus 680 million KRW without—a difference of 420 million KRW, with reinvestment delivering 62% higher returns. This occurs because reinvested dividends purchase additional shares that themselves generate dividends, creating a snowball effect. Implementing dividend reinvestment: First, use your brokerage's automatic reinvestment service. Most U.S. brokerages (Schwab, Fidelity, Vanguard) offer DRIP functionality that automatically purchases ETF shares when dividends are deposited. Fractional share purchases are available commission-free for maximum efficiency. Second, manual reinvestment. For Korean brokerage accounts, receive dividends and manually purchase ETF shares. Since dividends are paid quarterly, buy every three months, or accumulate several quarters' worth of dividends for larger purchases. Third, cross-asset allocation. Invest dividends in different ETFs (QQQ, TLT, etc.) rather than SCHD to achieve a rebalancing effect. For example, if your equity allocation has grown too high, use dividend income to purchase bond ETF AGG. Choosing between dividend reinvestment and withdrawal: During the wealth accumulation phase (ages 30-50), reinvest 100% of dividends to maximize compounding. With no need for income and a long-term growth objective, reinvest all dividends to build wealth. During the pre-retirement phase (ages 50-60), reinvest 50% of dividends and withdraw 50% for supplemental living expenses or discretionary funds. This period balances wealth accumulation with income generation. In retirement (age 60+), withdraw 100% of dividends for living expenses. The goal is to preserve principal while living on dividend income alone, with no further reinvestment. Holding 100 million KRW in SCHD generates approximately 3.5 million KRW annually in dividends for living expenses. Set dividend reinvestment ratios by age bracket in the rebalancing calculator (100% at age 30, 50% at age 50, 0% at age 70) for automatic adjustment, and you can execute a dividend strategy aligned with your life cycle. Dividend reinvestment is the most powerful weapon for long-term investing, so the younger you are, the more aggressively you should utilize it.
Age-Based SCHD Allocation Strategy
Because SCHD provides stable dividend income, it's effective to adjust its allocation based on your age and retirement timeline. In your 30s (wealth accumulation phase), focus on growth while building a foundation with SCHD. Allocate SCHD 15-20% + QQQ 30% + VTI 30% + AGG 15% + other 5%, maintaining a growth-oriented approach while SCHD adds stability. Reinvest 100% of dividends to maximize compounding, with SCHD serving as a defensive buffer during volatile markets. At this stage, you have employment income and a 30+ year investment horizon, allowing aggressive allocation—but maintaining approximately 20% in SCHD provides psychological comfort during sharp market declines. In your 40s (wealth expansion phase), pursue a balance of growth and stability. Allocate SCHD 25% + VTI 30% + QQQ 20% + AGG 20% + IEF 5%, increasing SCHD to 25%. Reinvest 70% of dividends and withdraw 30% for children's education or housing costs. With 15-20 years until retirement and growing expenses, maintain growth potential while supplementing cash flow with dividend income. With 100 million KRW in SCHD, you'd receive 3.5 million KRW in annual dividends—reinvesting 2.45 million KRW and withdrawing 1.05 million KRW. In your 50s (pre-retirement phase), increase stability and expand income. Allocate SCHD 30% + VTI 25% + AGG 25% + IEF 15% + TLT 5%, raising SCHD to 30% while reducing or eliminating QQQ. Reinvest 50% of dividends and withdraw 50% for retirement fund preparation or discretionary use. With retirement within 10 years, reducing volatility and securing predictable income becomes paramount. SCHD and bonds provide stability while VTI maintains moderate growth exposure. At age 60+ (retirement), focus on income maximization and principal preservation. Allocate SCHD 35-40% + VTI 20% + AGG 30% + IEF 10%, bringing SCHD to its maximum allocation. Withdraw 100% of dividends for living expenses while preserving principal as much as possible. With 300 million KRW in SCHD, receive approximately 10.5 million KRW in annual dividends for living expenses, supplementing any shortfall with pensions or other income sources. The goal is stable cash flow regardless of price fluctuations, making SCHD optimal given its low risk of dividend cuts. A 40% bond allocation secures principal stability, while 20% in VTI maintains minimum growth. Even in retirement, with 10-20 years of investment horizon remaining, a SCHD + VTI combination is more effective against inflation than 100% bonds. Life cycle rebalancing: You can apply a mechanical rule of increasing SCHD allocation by 1% each year on your birthday. Automatically adjusting from 15% at age 30 → 25% at age 40 → 35% at age 50 → 40% at age 60 enables age-appropriate allocation without emotional decision-making. Pre-set your target allocations by age in the rebalancing calculator and review them annually on your birthday. Use the asset allocation calculator to simulate expected returns and volatility for each age-based allocation combination to validate your life cycle strategy.
Dividend Stock vs Growth Stock Rebalancing Strategy
Since dividend stock SCHD and growth stock QQQ have contrasting characteristics, rebalancing to maintain the right balance between these two assets is crucial. SCHD provides stable income and low volatility but limited growth, while QQQ offers high growth potential but with greater volatility and virtually no dividends. By combining both assets appropriately, you can pursue income and growth, stability and aggression simultaneously. Balanced allocation strategy: SCHD 25% + QQQ 25% + VTI 25% + AGG 20% + other 5%, allocating equal weight to SCHD and QQQ. This captures both SCHD's 3.5% dividend income and QQQ's 15% capital gains, and the low correlation between the two assets (0.6) provides excellent diversification. This combination suits most investors as a standard allocation. Growth-focused strategy: QQQ 35% + VTI 25% + SCHD 15% + AGG 20% + other 5%, overweighting growth stocks. Suitable for younger or aggressive investors, this maximizes short-term returns but also increases volatility. Maintaining SCHD at a minimum 15% serves as a safety net for defensive protection during sharp declines. Income-focused strategy: SCHD 35% + VTI 25% + AGG 25% + IEF 10% + other 5%, overweighting dividend stocks and bonds. Suitable for retirees or conservative investors, this secures stable total income of approximately 7% from SCHD dividends at 3.5% plus bond interest at 3.5%. It's insensitive to price fluctuations with predictable cash flow, ideal for retirement living. Rebalancing rules: First, periodic rebalancing. Review SCHD and QQQ allocations quarterly, adjusting when they deviate more than ±5 percentage points from targets. For example, if SCHD's target of 25% has dropped to 20% due to price decline, buy an additional 5% to restore it to 25%. If QQQ has surged to 30%, sell 5% to reduce it to 25%. Second, business cycle response. During recessions, expand SCHD to 30% and reduce QQQ to 20% for greater defensiveness. During recoveries, expand QQQ to 30% and reduce SCHD to 20% to maximize growth exposure. Business cycle indicators include the ISM Manufacturing Index, unemployment rate, and Federal Reserve policy, considered collectively. Third, valuation adjustment. When QQQ's P/E ratio exceeds 35x indicating overheating, reduce its allocation from 25% to 20% and move profits to SCHD or bonds. If SCHD's dividend yield falls below 2.5% (due to a price surge), reduce its allocation; if it rises above 4.5% (due to a price drop), increase it. Fourth, tax-efficient rebalancing. U.S. stocks are subject to a 22% capital gains tax, so consider taxes when rebalancing. For example, selling QQQ requires paying 22% tax on gains, so whenever possible, use new cash inflows to adjust allocations. If you're investing 1 million KRW monthly and QQQ is overweight, direct all contributions to SCHD purchases to rebalance while minimizing sales. Correlation dynamics: SCHD and QQQ have a correlation coefficient of 0.6, meaning they move somewhat independently. When QQQ drops sharply, SCHD defends, and when SCHD underperforms, QQQ drives growth—complementing each other. Set your SCHD and QQQ target allocations and bands in the rebalancing calculator for quarterly automatic adjustment to maximize the synergy between these two assets. Use the asset allocation calculator to backtest various SCHD-to-QQQ ratios (50:50, 60:40, 40:60, etc.) against historical performance to find your optimal combination.
Dividend Stock Investment Risks and Mitigation Strategies
While dividend stocks are stable, they carry inherent risks that require proactive management. First, dividend cut risk. Companies may reduce or suspend dividends during economic downturns or earnings deterioration. During the COVID-19 pandemic in 2020, many companies cut dividends, and SCHD's yield temporarily fell to 2.8%. The mitigation strategy is to select companies with long dividend histories. SCHD only includes companies with at least 10 consecutive years of dividend payments, reducing cut risk. Additionally, diversify across multiple ETFs. Combining SCHD with VIG (dividend growth), DGRO (dividend growth and quality), and SDY (dividend aristocrats) rather than holding SCHD alone reduces the impact of any single ETF's dividend cuts. Second, interest rate risk. When interest rates rise, the relative attractiveness of dividend stocks diminishes, potentially causing price declines. For example, a 3.5% dividend yield carries only a 0.5 percentage point premium over a 3% Treasury yield—but if Treasuries rise to 5%, the premium becomes -1.5 percentage points, increasing demand to sell dividend stocks and buy Treasuries. The mitigation strategy is to reduce SCHD allocation during rising rate environments and increase short-term bond (SHY) or cash positions. After confirming rates have peaked, rebuild SCHD allocation. Third, sector concentration risk. SCHD has high exposure to financials, energy, and utilities, meaning overall performance suffers when these sectors struggle. For example, when energy prices collapsed in 2020, SCHD fell -12%. The mitigation strategy is to hold sector-diversified ETFs alongside SCHD. VTI is evenly distributed across all 11 sectors, compensating for SCHD's sector concentration. A SCHD 25% + VTI 30% combination mitigates sector risk. Fourth, inflation risk. When the 10% dividend growth rate exceeds 5% inflation, real dividends increase—but if inflation surges to 12%, real dividends decline. Dividend stocks underperformed during the high-inflation 1970s. The mitigation strategy is to add inflation-protected bonds (TIP) and gold (GLD) to your allocation. A SCHD 25% + TIP 10% + GLD 5% combination enhances inflation defense. Fifth, foregone growth opportunities. Companies that pay dividends sacrifice growth reinvestment opportunities, potentially resulting in lower returns compared to growth stocks over the long term. Over the past 30 years, S&P 500 dividend stocks returned approximately 9% annually while non-dividend growth stocks returned 12%. The mitigation strategy is to hold both growth and dividend stocks. A SCHD 25% + QQQ 25% combination pursues both dividend income and capital gains simultaneously, compensating for foregone growth. Pre-set response rules for different risk scenarios (dividend cuts, interest rate spikes, sector crashes) in the rebalancing calculator, and execute mechanically when signals appear—eliminating emotional judgment and maintaining disciplined responses. Dividend stocks are stable but not infallible, so recognize the risks and manage them through diversification and rebalancing.
Conclusion
The dividend ETF SCHD is a core asset for long-term investing and retirement portfolios, offering stable income and low volatility. Adjust your SCHD allocation within the 15-40% range based on your age and investment goals, and maximize the compounding effect through dividend reinvestment. Use the rebalancing calculator to balance it with the growth-oriented QQQ, and the asset allocation calculator to find the optimal combination that pursues both income and growth.
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