The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is delivering an exceptional year, defying its reputation as a conservative alternative to growth-focused funds. The ETF has returned approximately 20% in 2026 to date, outpacing the S&P 500‘s roughly 11% gain and the tech-heavy Nasdaq-100‘s 17% advance.
That outcome runs counter to recent market dynamics. For much of the artificial intelligence boom, growth indexes have set the pace while income-oriented funds served primarily as stability anchors. Yet this $95 billion portfolio of dividend payers now trades at a 52-week high, yields about 3.2%, and carries an expense ratio of just 0.06%.
Here is a closer look at how the fund achieved that performance.
How the Fund Selects Its 100 Holdings
The ETF tracks the Dow Jones U.S. Dividend 100 Index, whose eligibility rules drive the selection process. Companies must have paid dividends for at least ten consecutive years; real estate investment trusts and master limited partnerships are excluded entirely.
From that universe, the index ranks the highest-yielding candidates on four fundamentals: free cash flow relative to total debt, return on equity, dividend yield, and five-year dividend growth. The top 100 qualify, with buffer rules that favor existing constituents. No single stock may exceed 4% of the index at rebalance, and no sector may surpass 25%. The index is reviewed annually and rebalanced quarterly.
Those quality screens serve a critical purpose. Ranking by free cash flow to debt and return on equity helps the index avoid yield traps—companies whose elevated payouts signal deteriorating fundamentals. The methodology targets payers with the capacity to sustain and grow distributions, a prerequisite for a durable income portfolio.
The resulting portfolio bears little resemblance to growth benchmarks. The largest holdings—UnitedHealth Group, Home Depot, and Abbott Laboratories—each represent roughly 4.3% to 4.5% of assets, joined by names such as Coca-Cola, Procter & Gamble, and Chevron. Healthcare and consumer staples each account for approximately 21% of the portfolio.
Equally important is what the rules exclude. The market’s dominant AI names, with their minimal yields or limited dividend histories, do not qualify. A scan of the fund’s top 25 holdings reveals no exposure to Nvidia, Microsoft, or Alphabet.
Why the Formula Is Working This Year
That exclusion has been a drag on relative performance for most of the AI rally. In 2026, it has become an advantage.
Many of the market’s most expensive software and AI names have struggled this year, prompting a rotation toward steadier earners. Capital has flowed into drugmakers, household staples, and energy—sectors where this fund was already heavily concentrated.
To be fair, the growth benchmark has not surrendered the longer-term race. Over the trailing 12 months, the Nasdaq-100 has returned about 30%, still ahead of this fund’s 27%. What 2026 has done is invert the recent order. That shift says more about how extended the growth trade had become than about dividend stocks suddenly becoming exciting.
Meanwhile, the income stream continues. The fund has distributed $1.05 per share over the past 12 months, yielding roughly 3.2% at current prices.
The portfolio also trades at approximately 17 times its holdings’ earnings, versus the mid-20s for a broad S&P 500 index fund. Investors are acquiring a cheaper collection of businesses while being paid more to hold them.
In that sense, the fund behaves more like a single, giant value stock than any constituent of the growth indexes.
Investment Considerations
Should investors buy a dividend ETF after a 20% run? Expectations should be calibrated first. A dividend screen will not outrun the Nasdaq-100 in most years—that is not its objective. Its role is to deliver a growing income stream from durable businesses with less volatility along the way. The fund has executed that mandate well, compounding at roughly 13% annually since its launch more than a decade ago. If AI stocks reassert leadership in the second half, the performance order could reverse just as quickly.
For investors seeking income and a portfolio anchor that does not depend on the AI trade remaining hot, the fund remains a compelling holding even near its high. The rules that built it have not changed. And after a year like this one, they are harder to dismiss as boring.
