SCHY: A Globalization in Search of Yield (NYSEARCA:SCHD)

Dividend stocks and ETFs have performed well in recent months, which is obviously great if you already have significant holdings and not so great if you’re looking to buy. Juicy dividend yields are getting harder and harder to find, and my scan is revealing just 47 stocks in the S&P 500 (SPY) with a TTM return of over 4%. Many of these have questionable foundations.

Equity dividend ETFs are in a similar situation, and returns in the 4-5% range are rare. Buy-write ETFs seem like the answer to higher returns, but they’re not for everyone. I decided to look into whether international equity ETFs are a valid alternative, and this article focuses on the Schwab International Dividend Equity ETF (SCHY), with its attractive FWD yield of 4.58%.

Introducing SHY

SCHY was launched quite recently in 2021 and is practical international version of the popular Schwab US Dividend Equity ETF™ (NYSEARCA:SCHD).

A higher expense ratio of 0.14% is probably to be expected given the international exposure and taxes. The total return over the past year is similar to SCHD, but SCHD has a slight edge. I find it interesting how correlated the two funds are, given that one is only focused on the US and the other is international.

This correlation declines over the longer term and over three years SCHD is the best performer. Most international stocks have outperformed the US for several years.

SCHY Holdings

SCHY is a passively managed index that tracks the Dow Jones International Dividend 100. It has a sophisticated screening process “focused on dividend quality and sustainability by screening non-US companies based on four dividend quality attributes.”

This is encouraging. I see international stocks as a higher risk than US stocks, and if the big dividends were earned by holding in poor quality stocks with big price drops, that would be a major red flag.

The selection methodology gets complicated, but I’ll try to break it down simply because it’s important to know exactly what the fund holds.

The first screens eliminate certain risky stock markets and sectors, such as REITs.

The index universe is defined as the Dow Jones Global ex-US Large-Cap and Dow Jones Global ex-US Mid-Cap constituents.

REITs are excluded from the universe.

For China, only stocks of companies trading in developed markets are eligible.

Additional screens are made. MDVT stands for 6 month average daily traded value. As well as ensuring liquidity. FMC represents float-adjusted market capitalization and therefore removes any small-cap stocks.

Inventory must pass the following screens:

• Minimum of 10 consecutive years of dividend payments

• Minimum FMC of USD 500 million (current constituents USD 400 million)

• Minimum six-month MDVT of $2 million

Eligible securities are then ranked on four fundamental-based metrics, which are given equal weight.

Free Cash Flow to Total Debt: Annual net cash flow from operating activities divided by total debt. Companies with zero total debt are ranked first.

• Return on equity: Annual net income divided by total shareholders’ equity.

• IAD yield

•Five-year dividend growth rate.

These are solid screens, and I especially like the inclusion of the five-year dividend growth rate. The goal is to include fundamentally sound stocks with a reliable, high-yielding dividend. An additional screen filters the volatility and the top 100 stocks are then selected and weighted as follows –

No single security can represent more than 4.0% of the index, no single Global Industry Classification Standard (GICS®) sector can represent more than 15% of the index, and exposure to Emerging Markets is capped at a weight of 15%…

The process is actually much more complicated, but I think you can see the general thinking behind it. It all leads to a portfolio with the following exposure:

The geographical exposure is shown below. The 15% cap on emerging markets is largely taken up by India, so China’s exposure is low.

The case for SCHY

With 133 stocks and an almost equal spread among its top three sectors — consumer defensive, financials and health care — SCHY is fairly well diversified. I noticed that one of its peers, the Vanguard International High Dividend Yield Index Fund ETF (VYMI) holds 1,566 stocks, but its screening process is certainly less rigorous and it achieves safety through huge diversification rather than quality. I prefer SCHY’s approach, although the statistics suggest that VYMI is the better performing fund.

As we’ve already seen, SCHY lags its US counterpart SCHD in total returns over the past year and three years. The statistics strongly favor SCHD.

However, these statistics are skewed by a weak start in SCHY’s first full year of 2022, which saw a reduction of over -9%. 2023 was much better, although VYMI still outperformed.

Additionally, SCHY has been able to outperform SCHD over the past six months and there is a strong correlation suggesting that price performance may be similar going forward.

SCHY’s appeal is largely its dividend. Its FWD yield is 4.58% while SCHD is only 3.4%. Distributions are paid quarterly.

I like that the dividend isn’t high due to falling prices, and has actually risen with the price over the past year (although it’s down from a high of over 5% in recent months). Distributions are increasing.

In conclusion, SCHY’s performance has improved and there is a case for international stocks to drive returns. VYMI still looks like the best fund and deserves further investigation.

risks

Many central banks are already cutting, and the ECB cut twice before the Fed even started easing. This has likely helped SCHY’s price performance this year, but the risk is that the cuts reflect a weaker EU economy. As most of SCHY’s holdings are in Europe and the UK, its shares may be weighed down by a sluggish economic environment.

I think SCHY’s selection process has filtered out high-risk stocks, but its exposure to various countries and sectors carries risks. With 39% of the fund in its top 10 holdings, it’s relatively concentrated for an international ETF.

ConCluSIonS

With U.S. dividends on the decline, investors can turn to international stocks and ETFs for higher returns. There is some merit to this, and SCHY offers a FWD yield of 4.58% from high-quality stocks. It has also performed well over the past six months and one year, although over the longer term, most international funds have underperformed the US.

Despite its sophisticated methodology, VYMI may be the best international fund and has outperformed. Therefore, I rate SCHY a “hold”.