The Schwab U.S. Dividend Equity ETF (SCHD) is very popular with dividend and total return investors alike. The fund enjoyed a solid period of outperformance but has slipped in recent years, relative to the S&P 500. That’s no slight on SCHD as most everyone has underperformed the tech-heavy U.S. stock market. And as we enter the rate cut environment and as value-oriented stocks come back into favour, I’ve found a U.S. quality dividend ETF that is head and shoulders above Schwab’s U.S. Dividend ETF in 2024. We’ll take a look at iShares U.S. Quality Dividend ETF – ticker XDU.TO.
SCHD looks for profitability by selecting higher dividend payers and also applies quality screens. As per the Seeking Alpha summary –
The investment seeks to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Dividend 100™ Index. To pursue its goal, the fund generally invests in stocks that are included in the index. The index is designed to measure the performance of high dividend yielding stocks issued by U.S. companies that have a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios.
I think SCHD is a very good choice. It has a very similar approach to the Vanguard Dividend Appreciation Index Fund ETF (VIG). In early 2015, I skimmed from top holdings of VIG when I created our market-beating U.S. stock portfolio.
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From SCHD inception, the returns and risk levels are very similar for SCHD and VIG. Though, both underperform the S&P 500.
VIG is superior on draw down and volatility.
I think SCHD is a good choice for those looking for greater value compared to the S&P 500, while side-stepping the Magnificent 7. I also like the Vanguard High Dividend Yield Index Fund ETF (VYM) for a value approach.
Keep in mind the dividends can be a divining rod finding certain kinds of companies. With respect to the physical dividend payments …
I’m buying iShares Quality Dividend XDU.TO
While I am a very patient investor and have not made any major moves in a decade, I did sell half of my Bell (BCE) stock. Given that it was a Canadian Dollar account and I wanted to fix more of my Canadian home bias, I moved the proceeds to the Canadian Dollar iShares Core MSCI US Quality Dividend Index ETF (XDU.TO). I trimmed many of my Canadian stocks to build that position to a meaningful level. It is now the biggest position in the Canadian RRSP account.
The ETF demands 5 years of dividend growth and also applies financial screens. It’s a quality approach that is aligned with my general approach to investing in U.S. stocks.
XDU is on a nice run, and it is superior to SCHD on the volatility front as well.
We can thank the sector arrangement for that. XDU is more concentrated in the defensive sectors – consumer staples, healthcare, and utilities. The greater concentration in staples is a big plus.
For XDU we have 32.11% in defensive sectors vs 29.88% for SCHD.
For retirees and through the financial crisis, the defensive sectors were almost twice as good as the traditional balanced portfolio.
The sectors for XDU.
And here’s the SCHD sector arrangement.
Compare that to the tech-heavy S&P 500
So the secret sauce for XDU also goes beyond sector arrangement. The financial screens for XDU find less volatility across sectors. And in 2024 they are finding better returns. That may be relevant moving forward as we are certainly now in a lower inflation, deflationary environment that also includes the potential of ongoing rate cuts.
The markets are suggesting that XDU is built for the times.
Creating Your Own Quality Dividend Index
Readers will know that I really like the idea of index skimming (copying) by holding enough constituents. U.S. investors cannot likely buy the Canadian XDU ETF, you can create your own. Canadians might look to the list of top holdings to find candidates for their U.S. stock portfolio.
Here’s a look at the top holdings with sector in XDU. The final column notes if the stock is also a SCHD constituent.
| (XOM) | EXXON MOBIL CORP | Energy | No |
| (PG) | PROCTER & GAMBLE | Consumer Staples | No |
| (JNJ) | JOHNSON & JOHNSON | Health Care | No |
| (HD) | HOME DEPOT, INC | Consumer Discretionary | Yes |
| (KO) | COCA-COLA | Consumer Staples | Yes |
| (CVX) | CHEVRON CORP | Energy | Yes |
| (PEP) | PEPSICO INC | Consumer Staples | Yes |
| (MCD) | MCDONALD’S CORP | Consumer Discretionary | No |
| (CSCO) | CISCO SYSTEMS. INC | Information Technology | Yes |
| (IBM) | INTERNATIONAL BUSINESS MACHINES | Information Technology | No |
| (ABT) | ABBOTT LABORATORIES | Healthcare | No |
| (QCOM) | QUALCOMM | Information Technology | No |
| (PM) | PHILIPP MORRIS | Consumer Staples | No |
| (VZ) | VERIZON | Communication | Yes |
| (TXN) | TEXAS INSTRUMENTS | Information Technology | Yes |
| (AMGN) | AMGEN | Healthcare | Yes |
| (CAT) | CATERPILLAR | Industrials | No |
| (PFE) | PFIZER | Healthcare | Yes |
| (CMCSA) | COMCAST | Communication | No |
| (UNP) | UNION PACIFIC | Industrials | No |
| (LOW) | LOWES | Consumer Discretionary | No |
| (BLK) | BLACKROCK | Financials | Yes |
| (HON) | HONEYWELL | Industrials | No |
| (COP) | CONOCOPHILLIPS | Energy | No |
| (LMT) | LOCKHEED MARTIN | Industrials | No |
| (MDT) | MEDTRONIC | Healthcare | No |
| (ADP) | AUTOMATIC DATA PROCESSING | Industrials | No |
| (ADI) | ANALOG DEVICES | Information Technology | No |
| (SBUX) | STARBUCKS | Consumer Discretionary | No |
Surprisingly, there is very little overlap. Only 10 of the above XDU holdings are in SCHD. We own 8 of the top XDU holdings in our 20=stock U.S. portfolio.
Shaping your U.S. stock portfolio
By overweighting certain sectors, we can shape the portfolio for more growth or more defense. Once again, for a defensive retirement-ready allocation we would overweight staples, healthcare, and utilities.
Traditional growth sectors include technology, consumer discretionary, industrials and financials.
You might also look to the GARP portfolio that I put together in 2023. It was as successful attempt to side-step the valuation issue with the U.S. market.
The Magnificent 12 GARP Portfolio Beats The Magnificent 7 Fuelled S&P 500 in 2024.
The portfolio beat the market from June of 2023 and in 2024.
Here’s the 12 conviction picks from mid-2023.
Wells Fargo (WFC), Berkshire Hathaway (BRK.B), HSBC Holdings (HSBC), Lowe’s (LOW), Kroger (KR), Amgen (AMGN), Comcast (CMCSA), DICK’S Sporting Goods (DKS), Chubb Limited (CB), TDK Corp (TTDKY), Juniper Networks (JNPR) and Caterpillar (CAT).
Four of the GARP 12 are in the XDU top holdings. Lowe’s, Amgen, Comcast, and Caterpillar.
That gives you additional prospects when building your U.S. stock portfolio.
I have built up XDU to a very solid position, and we have some nice gains. I will look to trim profits and move those proceeds to individual defensive stocks that we already hold – PepsiCo and Johnson & Johnson. I may then initiate positions in other XDU staples.
Walmart (WMT) and Colgate-Palmolive (CL) are two other favourite holdings, but after incredible price gains those have become very expensive.
The Sunday Reads
At Stocktrades, Manulife is back from the dead. The major insurance companies have turned into market leaders. Stocktrades outlines why they are back from the dead, or at least doldrums.
Life insurers are experiencing a period of strong performance for several reasons. One major driver is rising interest rates, which are boosting insurers’ bond portfolios and underwriting margins. This allows companies to earn higher returns on their investments.
Demographic shifts are also playing a crucial role. Aging populations in North America and Asia are increasing demand for life insurance and retirement products. As people get older, they tend to become more risk-averse and seek financial protection. For this reason, the company is seeing large growth in AUM.
I included Manulife, Sunlife and Power Corp (owner of Great West Life) when I put together my wife’s version of the Canadian Wide Moat Portfolio. The insurers have been portfolio leaders.
Here’s the holdings and returns for the VDY Plus Portfolio. That portfolio continues to shine, and beat the TSX Composite.
Dividend Hawk looks at his dividends and stock stories of the week. In the mix was earnings from Johnson & Johnson, a company that we both hold.
Johnson & Johnson (JNJ) Reports Q3 2024 Results; JNJ reports second quarter Non-GAAP EPS of $2.42, 9% below last year’s result but $0.21 more than expected. Revenue of $22.5 billion beats analyst estimates by $330 million and increased 5.4% versus the same quarter last year. Management guides Operational Sales between $89.4B – $89.8B and Adjusted EPS (Diluted) between $9.88 – $9.98.
Our CVS also reported. That company continues to struggle. But I’m hanging on.
At Banker on Wheels looks at what Ben Felix is getting wrong about bonds, and more.
Canadians value advice?
At Findependence Hub Vanguard says that Canadians value advice. That said, there is a massive split with younger Canadians deciding to self-direct, while retirees and near retirees are stuck to their advisors. There’s more trust for the older generations.
I would certainly challenge the study and results. Investors may have the opinion that their advisor is adding value. That doesn’t mean that value is being added. When I was an advisor and trainer at Tangerine Investments I conducted portfolio reviews for Tangerine clients’ outside portfolios. I found the simple and effective index-based Tangerine portfolios beat about 99% of the clients (advisor selected) portfolios. It was very rare for a client to express a favourable opinion of their advisor relationship.
Keep in mind that most Canadians are in very poor performing high fee mutual funds, and they receive no advice, as the advisor is a sales person.
Related post: Don’t give away half of your investment returns – Beat The Bank.
That’s not to discount that there are some good advisors ‘out there’. It’s just not the norm, at all.
Tangerine was Canada’s first “Robo Advisor”. It is a very good option, but you can do better. Check out Justwealth – Canada’s top Robo Advisor. You can have it all with advice, financial planning and low-cost ETF portfolios.
Justwealth. The Canadian Robo Advisor that knows when to get personal.
And if you want to go it alone, you can build your own ETF Portfolio, or look to the wonderful all-in-one global asset allocation ETF portfolios. If you have questions or need help on taking control of your investments and saying goodbye to your high fee mutual funds, use that Contact Dale form on this post. I’m more than happy to help.
American exceptionalism
And more on one of my favourite topics …
And a quick look at my 3 U.S. stock picks from 2014 …
I have set a series of modest rolling limit sales for Apple. If the markets cooperate we’ll sell some shares at higher and higher prices to create retirement income.
And more on BlackRock …
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Just curious whether XDU is also a prudent choice for one’s TFSA? Or given that it holds us stocks, is it best for RRSP? Or doesn’t matter? Thanks. Your blog is always engaging.
Hi Steve. I still like XDU for any account. Asset allocation and risk should trump tax perfection. But certainly we will face the withholding taxes on the dividends, but it is a very minor event.
When possible and suitable it would be favourable to hold U.S. assets in U.S. dollar accounts in RRSP and Taxable.
Hi Dale,
I have been reading your thoughts on Bell with interest and would love your thoughts on my line of thinking (I’m 54 and hoping to retire in 4-6 years).
I bought 2300 shares of Enbridge at $48.37 when it had a yield of $7.76%. It’s had a nice run up to $57.97 and I feel it’s getting a little topsy. I’m thinking of selling it after the xdividend day on Nov. 15, so I get the next dividend and then use the funds to buy BCE, which I would buy before its xdividend day on Dec. 15th. If I do this, I would get the BCE dividend in January which would be about $2900. I know you ‘hung’ up on Bell, but it has a nice yield now above 8.5% and the chart looks to me like it says it might have bottomed. I’m thinking that if we are in an environment of lowering rates there’s a good chance that BCE may see some share price appreciation like many of the larger utilities have experienced. I would appreciate any feedback you might have for me on my idea to sell ENB and buy BCE. Thanks Cathy
Hi Cathy, I would not sell Enbridge based on a fear of it topping out. Though I had had enough of Bell though, as the dividend is not covered. They are paying out cash flow that they don’t produce. That seems a troubled sector, though we are still holding some Telus and Quebecor.
If Enbridge is not too greatly overweight in your portfolio it would be a good long term hold IMHO.
I think there are better places than Bell, but that’s just me. Remember the dividend is irrelevant in that it does not create value or contribute to total return. It’s a removal of value and the share price drops by an equal amount on ex dividend day. We should not use the dividend to determine a stock’s value in the portfolio.
Feel free to fire away again. I’m happy to answer.
Hi Dale,
Thanks for your perspective. Given your insights, I will hold ENB and stay away from Bell. Also a good point about balancing out my portfolio, it is a little overweight so I do need to find something. I’ve been focusing on dividends as part of my retirement strategy but sounds like I may be missing the forest for the trees!
Cathy
Hello! I, probably, mistakenly assumed that any Canadian ETF that holds yielding USD security, is subject to 15% withholding tax on dividends, even if the ETF is held at RRSP. Was I wrong?
Hi Boris, that is correct. There will be withholding tax. Same if held anywhere due to being a CAD ETF. It’s a minor event though in the grand scheme of total returns. Same as using an asset allocation ETF, or building your own Canadian Dollar ETF.
Risk, diversification and growth prospects should trump tax perfection.
We also hold U.S. stocks in our RRSPs directly that don’t face the withholding taxes.
I could do the conversions to move proceeds to the U.S. RRSPs, but I really like XDU.TO
And one can certainly find very good U.S. Dollar ETFs to hold in U.S. Dollar RRSP and Taxable accounts.
Thank you, Dale. I agree that withholding tax consideration might be generally considered as minor, but in case of higher yielding ETF it is slightly more painful. That’s why for higher yielding ETF I prefer buying US ETFs as DGRO, SCHD, VYM. etc.
Hello Dale,
I was wondering what you think of ZDY. It has a similar sector mix as XDU but with different weighting. It’s one of my core positions in my CA $ accounts.
XDU edges out ZDY in distributions are similar, but ZDY edges out XDU when it comes to growth, even with a substantially higher expense ratio.
(Below values are all %)
Symb: Div, 1y, ytd, 5y, exp
Zdy: 2.11, 30, 19, 38, 0.3
Xdu: 2.2, 28, 17, 40, 0.16
Thanks
Thanks for that. I looks like the returns are just slightly better for XDU for the full period and the volatility and draw down is superior for XDU. Though ZDY looks quite solid.
Thanks for your comment and for dropping by.
Hi,
I’m looking at swapping ZDY with XDU but I’ve noticed that XDU average volume is very low, around 2.5k. Do you know if they use market makers to keep the fund liquid? Am i being overly worried about this?
Hi, I put a reply in this Sunday Reads …
https://cutthecrapinvesting.com/2024/11/10/the-u-s-stock-market-has-its-best-week-of-the-year-on-the-sunday-reads/
It comes down to the liquidity of the underlying holdings, not the trading volume of the ETF trading 🙂
Hello again, thanks for your answer in this week’s Sunday Reads and also thanks for your Ever Wonder post from 2019.
My concern with liquidity had more to do with ability to sell quickly, and the spread, rather than with premium or discount of an ETF.
Let’s say I have 500 XDU shares, which is about 20% of the average daily volume of XDU, if i wanted to sell all of them in a normal market day (as opposed to a very active red day, because then all bets are off), would an AP step in and make sure I can sell my shares without having to discount them?
Thanks