The recent correction in the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD) has many passive income investors wondering if it’s time to load up or jump out. With the S&P 500 on its way to new highs, the dividend stock-heavy SCHD has been in a bit of a tough spot, still down 10% from its own highs hit back in the fourth quarter of last year.
Indeed, the difference in trajectories may have some opting for the S&P 500 over the SCHD, even if it means losing out on more than 2% in extra yield. And while the SCHD has been in recovery mode since April, just like the S&P 500 and Nasdaq 100, the SCHD’s recovery has been far less sharp. Though only time will tell, I do think the SCHD is a compelling buy on the dip for those seeking a cheaper (SCHD’s price-to-earnings (P/E) ratio sits at a low 15.9 times at the time of this writing), dividend-focused (4% yield) way to invest through what’s sure to be a second half full of surprises (good and bad).
Key Points
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The SCHD and PEP have been under pressure recently. But it doesn’t make a lot of sense to compare the ETF to one of its smaller constituents.
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The SCHD looks like a much better bet than PEP going into the 2025’s second half.
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Pepsi stock gets popped, now down 33% from its all-time high
Of course, PepsiCo (NYSE:PEP) stock’s devastating 33% decline from 2023 peak levels shows us that even the seemingly safe low-beta defensive dividend stocks can take a huge hit to the chin. And while the defensive dividend payers are having a tough moment, I don’t view PEP stock’s implosion as a sign of things to come for the SCHD. Indeed, not all defensive dividends are created equally.
The SCHD is a diversified basket of high-quality names that can benefit greatly once the next growth-to-value rotation happens. And while PEP stock would catch a break if we were to see a reversal of investor appetite at some point in the second half, investors should be mindful of the company- and consumer-packaged-goods-specific woes currently facing Pepsi. Undoubtedly, just because Pepsi stock is leading the way lower doesn’t mean it’s lights out for the value-conscious dividend trade.
So, with that in mind, here’s what investors should watch for as the SCHD limps back from its nearly 18% peak-to-trough fall, as some of its constituents, like Pepsi, falter.
As goes Pepsi, so goes the rest of the defensive dividend plays?
Pepsi has been a long-time bellwether for the defensive dividend plays. And right now, it’s unwell after shedding a third of its value in around two years. Though there are serious industry-wide headwinds plaguing the consumer giant (most notably among them have to be the rise of GLP-1 drugs, macro headwinds, and tariff-related expenses), I do think that all one has to do is look at shares of Coca-Cola (NYSE:KO), which have been thriving this year, up 13% year to date, to see that it isn’t all doom and gloom as far as consumer staples are concerned.
In any case, I’d strongly encourage investors interested in buying the dip in an ETF like the SCHD to look underneath the hood. The SCHD may have more than its fair share of consumer packaged goods stocks (around 19% of the portfolio), but it’s not primarily a consumer staple ETF. It’s an ETF that invests in fundamentally sound firms with robust dividends and above-average yields. You’re getting more energy exposure (21% of the portfolio), some high-yield healthcare names (15.6%), industrials, financials, and more. Arguably, it’s a more diversified way to play the market, given that its modest technology (7.8%) exposure versus the S&P 500.
Is the SCHD a better bet than Pepsi stock?
Pepsi faces serious challenges as things worsen before they get any better for the snack food industry. Higher prices and weakness in the drink business have really weighed the ex-market darling down. RBC Capital’s Nik Modi astutely pointed out that consumers have caught on to “shrinkflation,” with many “angered” consumers opting to look elsewhere.
Add GLP-1 drug uncertainty into the equation, and PEP stock may not be as cheap as it seems at 18.9 times trailing P/E. Going into the second half, I’d much rather be in the likes of a SCHD, which could find itself back to new highs shortly after the S&P 500 attempts to breakout for the summer.
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