The yield chase is over.
Investors are waking up to a cold reality. The Schwab US Dividend Equity ETF (SCHD) has spent the last twelve months proving that backward-looking quality metrics are no shield against a shifting macro regime. While the broader indices rode the wave of infrastructure spending and silicon dominance, the income-focused cohort sat in the doldrums. The strategy is failing. It is not a temporary dip but a fundamental misalignment with the current cost of capital.
The methodology trap
SCHD follows the Dow Jones U.S. Dividend 100 Index. This index requires a minimum of ten consecutive years of dividend payments. It sounds prudent. In practice, it is a rearview mirror approach to a high-speed collision. By filtering for decade-long consistency, the fund systematically excludes the most aggressive cash-flow generators of the modern era. It prioritizes the ghosts of past profitability over the engines of future growth. According to data tracked by Yahoo Finance, the fund’s heavy tilt toward consumer staples and old-guard financials has turned it into a graveyard of stagnant multiples.
The screening process utilizes cash flow to total debt, return on equity, and dividend yield. These are classic value metrics. They worked in a zero-interest-rate environment where any yield was a gift. Now, they are liabilities. When the risk-free rate sits comfortably above 4 percent, a 3.5 percent dividend yield with no growth is a losing proposition. The market has repriced risk. SCHD has failed to keep pace with the premium demanded by institutional desks.
A divergence in total return
The gap is widening. Throughout 2025, the divergence between the S&P 500 and dividend-weighted strategies reached levels not seen since the dot-com era. The tech-heavy benchmarks surged on the back of realized productivity gains. Meanwhile, SCHD remained tethered to companies struggling with margin compression and rising labor costs. The fund’s lack of exposure to the primary drivers of the equity risk premium has resulted in significant underperformance.
Comparison of 2025 Annual Returns
The interest rate anchor
Fixed income is the new competitor. For a decade, there was no alternative to stocks for yield. That era ended. As reported by Bloomberg, the persistence of elevated yields in the Treasury market has siphoned liquidity away from dividend aristocrats. Why hold a basket of slow-growth retailers when a two-year note offers a guaranteed return with zero equity risk? The equity risk premium for SCHD has effectively vanished.
The technical mechanism is simple. Dividend stocks are often treated as bond proxies. When rates rise, the present value of future dividends drops. This is basic discounted cash flow analysis. However, unlike growth stocks, which can outrun inflation through price hikes and innovation, the companies in SCHD are often price-takers. They are stuck in competitive, low-margin industries. They cannot grow their way out of a high-rate environment. They can only cut costs, which eventually hits the very dividends that investors crave.
Concentration and sector rot
The portfolio is top-heavy. The concentration in sectors like Financials and Energy has exposed the fund to cyclical volatility without the upside of growth. Many of the top holdings are legacy banks facing increased regulatory scrutiny and a narrowing net interest margin. These are not the growth engines of the next decade. They are the utilities of a past century. The lack of exposure to the “Magnificent” growth drivers is a deliberate choice of the index, but it is a choice that has cost retail investors billions in opportunity cost.
The flaw is the rebalancing frequency. The index only rebalances annually. In a market that moves at the speed of light, an annual adjustment is an eternity. By the time the index drops a laggard, the damage is already done. The fund is perpetually catching up to a market that has already moved on. This lag is a structural defect that cannot be fixed without changing the underlying mandate of the fund. Investors are paying a management fee to hold a collection of yesterday’s winners.
Watching the February pivot
The immediate horizon is bleak for income purists. All eyes are now on the upcoming FOMC meeting scheduled for early February. If the Federal Reserve maintains its hawkish stance or signals that the terminal rate will remain above 4.5 percent for the remainder of the year, the pressure on SCHD will intensify. The specific data point to watch is the 10-year Treasury yield. If it breaks above the 4.8 percent resistance level, we expect a massive liquidation event in dividend-weighted ETFs as institutional portfolios rotate further into high-quality debt. The yield trap has snapped shut, and the exit is getting smaller every day.
