Fed Rate Hike Shifts Math on Popular Dividend ETF SCHD

The Federal Reserve's latest rate hike has significant implications for investors holding the Schwab U.S. Dividend Equity ETF (SCHD). Despite its steady image, SCHD's performance is affected by the rising cash yields and the Fed's restrictive stance.

SCHD tracks the Dow Jones U.S. Dividend 100 Index, screening for balance sheet quality and dividend growth. It has a large net asset base of $94.9 billion and top holdings in QUALCOMM (6.74%), Texas Instruments (5.90%), and UnitedHealth Group (5.09%). However, its forward annualized dividend is only $1.01 against a share price of $33.75, resulting in a relatively low yield of 3.0%.

With the Fed's rate hike to 4.00%, cash yields have climbed above SCHD's distribution rate, making it less attractive as an income-generating investment. Moreover, its portfolio is heavily weighted towards rate-sensitive sectors such as financials, which are being squeezed by rising interest rates.

A potential alternative for investors seeking current income is to pair the JPMorgan Nasdaq Equity Premium Income ETF (JEPI) with a short-term Treasury bill or government money market fund. JEPI writes covered calls on a Nasdaq-weighted equity book, producing higher distribution yields than SCHD and scaling with implied volatility.

This swap changes the investor's risk profile, trading away potential long-run upside in bull markets for current cash flow. It also introduces counterparty exposure through structured notes issued by banks such as BNP Paribas and Citigroup. In a taxable account, embedded capital gains from SCHD may require trimming or redirecting new contributions to JEPQ.