SCHD is having one heck of a year. Through August, the dividend ETF was up more than 29%, more than doubling the S&P 500’s total return—and suddenly the “boring” dividend stocks don’t look quite so boring. But before we declare victory for dividends, there’s a more interesting story underneath the hood. SCHD’s outperformance is a cocktail of value, quality, stock selection, sector positioning and a market finally giving some of the usual suspects a little less attention. Sector allocation is only part of the explanation for SCHD’s remarkable performance in 2026. It appears that stock selection is one of the main drivers. So what’s going on? Why is SCHD outperforming in 2026?
As always the following is not advice, these are ideas for consideration as you manage your investment portfolios. Past performance does not guarantee future returns.
I think the more interesting story is that SCHD has benefited from a combination of factor exposure, individual stock selection, sector positioning and a changing market leadership environment. And importantly, this isn’t simply a story about dividends.
SCHD is a multi-factor ETF
The first thing to understand is that SCHD isn’t simply a collection of high-dividend-paying stocks.
Its methodology begins with companies that have paid dividends for at least 10 consecutive years. It then ranks those companies using factors including free cash flow relative to debt, return on equity, dividend yield and five-year dividend growth, ultimately selecting roughly 100 stocks.
That creates a portfolio with meaningful exposure to:
Value + quality + profitability + dividend growth + cash-flow strength.
That’s a very different proposition from simply buying the highest-yielding companies in the market.
SCHD’s valuation also reflects its value tilt. At the end of August, its P/E ratio was roughly 19.6 times, considerably below the valuation attached to many of the market’s largest growth companies. And that matters in a year when investors have started looking beyond the most expensive areas of the market.
For years, the S&P 500’s incredible performance has been dominated by mega-cap technology and growth stocks. And that concentration brings risks. There is the warranted fear of another – Lost decade for U.S. stocks that we saw at the beginning of this century. We experienced a decade and more of a negative real (inflation-adjusted) returns for the U.S. stock market (S&P 500).
One year ago on Findependence Hub I addressed that concentration and valuation risk in this post – Are these challenging times for recent retirees? To manage that risk I suggested that investors look to add a U.S. value tilt and more sensibly-priced Canadian and International equities.
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In Fall of 2025 I also offered this look at Schwab’s SCHD ETF.
In another post I shared …
The other side of the equation: S&P 500 concentration
At August 31, information technology represented approximately 37.9% of the S&P 500, with communication services at 9.5% and consumer discretionary at 9.1%.
SCHD has almost none of that mega-cap technology concentration.
That doesn’t necessarily hurt SCHD. In 2026, it has become an advantage because the market’s leadership has broadened. SCHD doesn’t need to beat Nvidia, Microsoft or the other mega-cap technology leaders. It simply needs the rest of corporate America to start catching up. And that’s essentially what we’ve seen.
The AI trade remains enormously important to the S&P 500. Goldman Sachs recently estimated that nearly half of 2026 S&P 500 earnings growth has come from AI-related investment. But SCHD has benefited from participating in a different part of the market.
Energy has been a major contributor
This is where sector allocation becomes particularly important. SCHD has maintained substantial exposure to energy companies, including Chevron and ConocoPhillips. As of September 17, Chevron represented approximately 4.27% of SCHD and ConocoPhillips another 4.09%.
The S&P 500, by comparison, had only about 3.5% in energy at the end of August. That’s a classic sector allocation effect.
SCHD simply had considerably more exposure to a sector that performed well. So yes, sector positioning matters. But stopping the analysis there would miss a much bigger part of the story. Here’s the U.S. secctor performance in 2026 …
The individual stocks have worked
Consider some of SCHD’s largest current holdings: Merck, Abbott Laboratories, Amgen, Coca-Cola, Chevron, ConocoPhillips, Procter & Gamble, Verizon and UnitedHealth. SCHD isn’t market-cap weighted like an S&P 500 ETF. It holds roughly 100 companies and limits individual positions.
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Here’s the SCHD Top Ten in 2026. We see the SCHD top ten offering an inverse relationship to the U.S. market during brief periods of decline.
That means a company such as Merck can have a meaningful impact on the portfolio without needing to be one of the world’s largest companies. And this is where the evidence becomes particularly interesting.
We looked at the 10 health-care companies that were in SCHD at the beginning of 2026, before the subsequent reconstitution: Amgen, Merck, AbbVie, Bristol Myers Squibb, Gilead Sciences, Cardinal Health, CVS Health, Medtronic, Pfizer and Becton Dickinson.
Equal-weighted, those 10 stocks produced a return of approximately 18.7% through September 2026, compared with roughly 8.8% for the S&P 500 Health Care sector.
That’s a difference of almost 10 percentage points. Nine of the 10 stocks were positive, with Merck particularly strong.
The fund reconstitutions (portfolio adjustments) have added to the outperformance.
SCHD is a great “stock picker”
That provides some evidence that SCHD’s performance cannot simply be explained by having exposure to health care. The particular companies it owned also performed exceptionally well.
And that’s an important distinction.
It’s not simply:
Energy went up, therefore SCHD went up.
It’s also:
A collection of profitable, cash-generating, dividend-paying companies that had been relatively overlooked performed very well.
We see the same stock selection story in the energy sector.
The dividend isn’t the reason
This is another important distinction. SCHD’s advantage in 2026 isn’t that it distributes a higher dividend than an S&P 500 ETF. Dividends are often calculated as part of total return, but a dividend payment itself doesn’t create additional wealth. When a company pays a dividend, cash leaves the company and the share price adjusts accordingly.
The relevant question is therefore:
Why did the underlying companies generate higher total returns?
The answer is that SCHD’s holdings have delivered a combination of share-price appreciation and dividends. That’s a total-return story, not an income story.
Starting valuations matter too
There’s another potentially important piece of the puzzle: valuation.
Going into 2026, the market had become highly concentrated in expensive mega-cap growth and AI-related companies. SCHD’s portfolio was comparatively inexpensive. When investors begin rotating toward companies that had been overlooked, those companies can benefit from both earnings growth and valuation expansion.
In other words, SCHD’s holdings don’t necessarily need spectacular earnings growth to generate strong returns if investors are willing to pay a higher multiple for those earnings.
The formula becomes:
earnings growth + dividends + multiple expansion.
Meanwhile, some of the market’s largest companies entered the year with extremely high expectations already embedded in their valuations.
Value beat more than just growth
Perhaps the most interesting evidence comes from comparing SCHD with the broader large-value category. Through August 31:
SCHD: +29.29%
Large Value: +16.45%
S&P 500: +13.14%
That tells us something important. If SCHD’s outperformance were simply a sector-allocation story, we’d expect it to behave much more like a generic large-value fund. Instead, SCHD significantly outperformed the broader large-value universe as well.
So what’s driving SCHD in 2026?
We’ll break the explanation into four pieces.
1. Factor exposure.
Value, quality, profitability, cash flow and dividend growth are the structural characteristics built into SCHD’s methodology.
2. Sector positioning.
Energy has been particularly important, while SCHD’s relatively modest exposure to mega-cap technology has mattered as market leadership broadened.
3. Stock selection.
The specific companies SCHD owns have performed extremely well. The health-care example provides a particularly interesting illustration.
4. A changing market regime.
After several years dominated by mega-cap growth and AI, 2026 has rewarded a broader group of companies.
SCHD has benefited from the intersection of value, quality, profitability, dividend growth and favorable sector positioning at a time when market leadership has broadened beyond the mega-cap AI trade.
And make no mistake the largest contributor appears to be the stock selection (stock picking) process. Chalk one up for rules-based factor investing.
The index hedge through major corrections
Moving through the major market corrections of our lifetime the screens worked very well. Dividendology shared this graphic. We see that from start dates before and leading up to the financial crisis in 2008, the Dow Jones Dividend 100 outperformed to present day.
Past performance does not guarantee future returns, but that is an encouraging chart for SCHD holders. For my U.S. valuation tilt I have embraced iShares XDU and iShares VLUE (U.S. Dollars).
XDU.T was outperforming SCHD, for a while. That ended, ha. Yes, I know we’re mixing currencies here, but in 2025 the U.S. dollar underperformed the CAD. The U.S.D. was a drag.
VLUE has actually outpeformed SCHD in 2026, but we’ll save that evaluation for another day 🙂
I also pay attention to valuation as I manage our U.S. portfolio of individual stocks.
Thanks for reading. Please add your thoughts in the comment section. And please join us at Wealth Club, where we’ll track Canadian Blue Chip stock portfolios and U.S. stock portfolios. The work and learnings from these ETFs will factor into the evaluation and portfolio-building process.
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