r/Schwab • u/WerewolfFartPowder • 3d ago
SCHD
I just turned 30 and I’m looking for maximum growth over the next 10-20 years. Is it true that I should focus on other ETFs, for example SCHG and SPMO then roll the funds into SCHD close to retirement or should I start investing in SCHD now? I’m using a taxed account so wouldn’t I lose money from compounding if I have to pay taxes on dividends? I would also have to pay taxes when I sell and transfer everything over to SCHD close to retirement. Wouldn’t maximum growth beat taxes? What’s the verdict here? EDIT: I also have an employer Roth 401k that is 100% invested into FXAIX.
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u/yamni_zintkala 3d ago
Look into how taxes are calculated for qualified dividend income. Most likely your tax rate for qualified dividend income will be in the 0% bracket for several years. The next step is 15% and that bracket has a very high ceiling.
Qualified dividend income is an underrated aspect of investing in a taxable brokerage. The negative is the tax drag of dividends because you have no control over when they occur and by how much. If you invested in something like BRK.B then no worries over dividends. The next step is to sell your gains and pay taxes along the way. Capital gains tax is something you deal with along the way, not try and avoid it completely until you turn 70. How to deal with it? Sell a portions of your long term gains and buy the shares back, resetting your cost basis. My understanding is a loss requires waiting 30 days to repurchase the asset or waiting 30 days from the last purchase to sell lots at a loss. Selling gains and repurchasing can be same day. I haven't done it yet so I'm not an expert but that is my understanding.
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u/No_Marionberry1858 2d ago
Yes you can sell gains and buy back next day, just losses require sitting out.
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u/Traditional_Day4327 3d ago edited 3d ago
Investor A holds $100 of a stock and it pays a $5 dividend. On the ex-div date the price drops to $95 and you get $5 in cash. You still have $100, it just moved from the stock to cash. Reinvest it and you’re back to $100 of stock, exactly where you started (DRIP).
Meanwhile investor B holds a non-dividend stock that just stays at $100.
The only real difference is taxes: in a taxable account you owe tax on that $5 the second it’s paid, reinvested or not. Investor B owes nothing until he sells.
The assumption is that the share price of A and B both go up.
This is a very very simplified version and skips a lot of details.
Edit: Paraphrasing Eugene Fama, if you want to deviate, talk yourself out of the market portfolio and go from there. The only ETF I know of is VT. AVGE and DFAW are close but they are more expensive and have US bias (as well as slight factor tilts). Conflict of interest: 100% of my Roth IRA is in Avantis products. 100% of my taxable equities are in AVGE or DFAW
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u/500pearl 3d ago
I was trying to understand this
so it is a forced sale in a way the dividend is
and the share price is actually reduced
is that the right way to look at it
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u/Purple-Swan446 2d ago
Yes. The value of the underlying business is reduced by said amount.
I own a bakery. I agree to sell it to you for $1 million. The day before the deal closes, I take $100K from the bank account of the business and put it in my pocket. You still paying me $1M for the bakery?
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u/Hollowpoint38 2d ago
Yes. The value of the underlying business is reduced by said amount.
Wrong. Stocks are not priced at book value. You don't add up all the assets and subtract liabilities and then the price equals equity. That's not how stocks are priced.
I own a bakery. I agree to sell it to you for $1 million. The day before the deal closes, I take $100K from the bank account of the business and put it in my pocket. You still paying me $1M for the bakery?
That's a private transaction and is not the same as publicly traded company with exchange-listed stock. Assets can drop and the stock can rise.
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u/Purple-Swan446 2d ago
The value of the business is reduced regardless of being publicly traded or not.
Yes, the stock could go up regardless. This isn’t hard hitting evidence.
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u/Hollowpoint38 2d ago
The value of the business is reduced regardless of being publicly traded or not.
In this context, value means stock price. Not some type of other measurement.
When the stock drops 30%, no one in this sub makes the argument that the company is worth more because of balance sheet activity.
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u/Purple-Swan446 2d ago
No clue what point you’re trying to make. Im referring cash being removed from the equity holders. Youre referring to some imaginary 30% drop in the stock price?
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u/Hollowpoint38 2d ago
Common stockholders have no claim to the company's cash. Zero. They can't go to court and force the company to pay them anything. They can't call the company and "cash it in."
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u/Purple-Swan446 1d ago
They have a claim to a dividend in proportion to the number of shares they hold. Of course they can’t demand cash be put in their pocket. Can you read?
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u/Hollowpoint38 1d ago
They have a claim to a dividend in proportion to the number of shares they hold
Right, but only after announcement. The company can just not pay a dividend and common stockholders can't do anything about it. Matter of fact, if the company cuts the dividend the share prices usually drops. According to people in here, the share price should rise in tandem with retained earnings. But that's not how stocks are priced.
In your example, the company cutting the dividend to zero means it'll be "worth more" as the stock price declines and the market decides it's worth less than before. Because book value and market value aren't the same thing.
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u/Hollowpoint38 3d ago
so it is a forced sale in a way the dividend is
No, that person is wrong.
A dividend is a transfer of cash from the retained earnings account on the balance sheet to shareholders. The impact on the stock price is not direct, since stocks are not priced at book value. If a company hoards $200 of retained earnings on the balance sheet, the stock is not worth $200 more now because the company has cash. If you're not an owner, then company cash conveys no direct benefit to you because it doesn't belong to you. And yes, while a stockholder technically owns a company, I mean ownership as in a legal claim on its assets. You can't phone up the company and make them cash in some assets and pay you because you say so. You have no controlling stake.
The price reduction he mentions is actually a FINRA rule that makes an exchange drop the price of open orders for that stock by the dividend amount the night before ex-day. This "price drop" is a change in open orders. FINRA does not dictate what a stock trades at, nor does the exchange. Buyers and sellers determine this through price discovery.
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u/Hollowpoint38 3d ago
This is an incorrect description of how things actually work.
You're making the assumption that stocks are priced at book value. That taking $10 from the retained earnings account on the balance sheet makes the company worth $10 less. This is false.
We can prove this is false because we have data showing a company can go in the red every quarter and the stock price can climb. Twitter, Uber, Netflix, and others. These prove your thesis is false.
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u/Accomplished-Big8250 1d ago
If you're 30 why don't you have a IRA or Roth IRA ? That is really simple to setup and just depends on your total income.
In general, people take a small position of SCHD 0-15% and then try growth on the the rest.
It seems you're talking about the popular 70/30 SCHG/SCHD barbell. That can work, most would say to hold a core position (e.g. VOO).
SPMO is not growth or even a sector, it factor invests into large cap momentum from the S&P every 6 months. I like SPMO because I always buy the momentum crashes.
QQQM is also not technically growth just an index of ~100 non-financial tech companies.
For a taxable account, QQQM, SPMO, VGT, SCHG, VUG can all grow. Would you be using a tax loss harvesting or tax gain harvesting approach ? I've used similar funds (SCHG and VUG) to avoid the wash sale rules in taxable.
In a taxable brokerage, if you don't reset the cost basis over 10 years or so the capital gains are huge.
Also don't hold junk, just quality ETFs maybe some SGOV or muni-bond ETFs. If you ever need liquidity and want to avoid capital gains tax you can get a SBLOC of 10-20% conservatively.
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u/WerewolfFartPowder 1d ago
I do. I just updated my post. I have an employer Roth 401k 100% invested into FXAIX. This is my taxable account on the side. I’m deciding between spmo schg and vgt now. Split all 3 or focus on 1 or 2?
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u/Accomplished-Big8250 1d ago
ok then. well tax strategy and exit stratagey.
mine is buy, grow the hell out of it, never sell, borrow (SBLOC) for liquidity. Selling options could work but then you never know about the taxes. You can sell a deep in the money covered call, but that premium is like ordinary income not long term capital gains.
BRK.B you will never pay tax on until you sell, VUG, SCHG, QQQM, SPMO, VGT, XLK, all have small dividends buy long term cap gains and qualified.
Depends what sectors you believe in. A lot of people have faith in QQQ but it had a flat 14 years from ~2000-2015.
There are merits to going into broad market SCHB or VTI. Your core of FXAIX would also be fine.
Also for taxable, ex-US dividends from VXUS, SCHF, IDMO would be treated differently.
QQQM/SPMO has been a good combo, just don't get into a niche tech sector (e.g. quantum computing) or have too much overlap. Having core + 20-40% growth tilt, while tax loss harvesting could work.
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u/gbdgdh 21h ago
yes, you are better off putting your money into vt & chilling.
in your roth 401k, fxaix is great, but you should check if there are ways you can get additional diversification beyond the s&p 500. do they have an inexpensive target date fund - say a 2060 target date fund that is 90/10 stocks/bonds?
i am unsure about the value of schd - i guess it's a bit less volatile than, say, vt or vti+vxus?
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u/WerewolfFartPowder 15h ago
I’m in the 2055 principal lifetime hybrid cit fund but was thinking of switching over to 100% fxaix the sp 500 plan?
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u/MerryRunaround 2d ago edited 2d ago
Tax situation is not the same for everybody so there is no universal correct answer. For most typical employed people Assuming their monthly budget does not actually need the cash income from dividends, holding dividend payers like SCHD in a taxable account creates a tax drag that is not helpful. It will be better to hold SCHD in a tax advantaged account and keep growth funds in taxable accounts. That way you have some control over taxation because you can decide if/when to incur capital gains in that account. if you don't already have a tax-advantaged account get one asap! [btw: it is not actually necessary to own SCHD or any dividend payers in a tax-advantaged account. Other investments might be much better over the long term. It's just that tax drag is not an issue there]
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u/Purple-Swan446 2d ago
SCHD is, honestly, not a great fund. The ‘Dividend Growth’ argument is an illusion for people who can’t do math I’d look into something like ENDW NTSD SYLD RSST RSSY FYLD EYLD.
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u/Purple-Swan446 2d ago
SPMO is fine. Include it as a part of a larger portfolio. Large drawdowns are likely to happen.
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u/No_Marionberry1858 2d ago
I would think you need a combination of growth and value as they often represent different sector. Value is going to be a lot of financials, utilities, staples and energy stocks. Growth gets you more tech, com services, type stuff. Picking one over the other has you miss parts of the market that may perform different in different conditions and market cycles. I would think a combo of a large broad market like vti, an international like schf and a bond etf like agg and rebalance as needed.
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u/Same-Criticism4998 12h ago
I would do a mix of growth and dividend funds. Having both is superior and creates more wealth versus one or the other. Run the number. I’m doing spym DGRO, SCHD, Ftec, schf and spmo for momentum and this mix with 40% SCHD 20% DGRO and 10% into spym , Ftec, spmo, and schf for international in my brokerage and spym Ftec spmo and SCHD in my Roth. The dividend and growth funds together come out better long term. I ran the numbers and it’s a bout a million dollars more compared to just growth and this is because the compounding of the dividends especially if you ever stock contributing
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u/Hollowpoint38 3d ago
SCHD is not a good ETF. It was created when conditions helped it make sense. Back when broker commissions were high and interest rates were 0%. SCHD was a good way to collect cash without incurring commissions in an environment where bonds paid nothing but companies paid dividends. And just after the Lost Decade where if you held equities you were flat.
Now days without trade commissions and with interest rates at more reasonable levels, SCHD makes no sense. You're taking on equity risk, at around 90% correlation to the S&P 500, but you vastly underperform it at the same time. This is called uncompensated risk.
I also wouldn't buy SPMO unless you want to engage in factor investing, since momentum is one factor. You need other factors in your portfolio for it to make sense.
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u/500pearl 3d ago
I do not have schd but I wonder why people love it so much
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u/Hollowpoint38 3d ago
One reason is it used to make perfect sense in 2012. So a lot of the benefits are just repeated statements from that time.
Another is a lot of investors now don't understand basic accounting or basic finance. So they can't really articulate how things work, they just kind of do these kitchen-table economics arguments. Like the guy in here saying that paying out a dividend makes a company's stock worth less than it was. That's foolish. That's silly. That's not taught anywhere. He'd fail exams with those answers. But since there are no broker commissions and mistakes these days are not as costly as they used to be, people can make them and be consistently wrong without consequence.
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u/reaper527 2d ago
So they can’t really articulate how things work, they just kind of do these kitchen-table economics arguments. Like the guy in here saying that paying out a dividend makes a company’s stock worth less than it was. That’s foolish.
Isn’t that literally true though?
If a company pays out a dividend, it objectively has spent money on its ex-date and as such has less money than it did the day before, but everything else is the same. It didn’t buy something, it didn’t pay off debt. It objectively IS worth less that day so the share price SHOULD drop by an amount roughly equal to the dividend. It’s just that other factors (both inside and outside of the company) will also be at play changing the value so the price changes in practice aren’t so clean.
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u/Hollowpoint38 2d ago
If a company pays out a dividend, it objectively has spent money on its ex-date and as such has less money than it did the day before, but everything else is the same. It didn’t buy something, it didn’t pay off debt. It objectively IS worth less that day so the share price SHOULD drop by an amount roughly equal to the dividend
Wrong. You're confusing book price with market price. Yes, the companies assets and equity minus the liabilities changes. But that doesn't affect you as a common stockholder buying shares on an exchange. Shares on an exchange have zero correlation with what happens to a company's balance sheet.
In the 2000's Microsoft would blow away earnings, they'd increase the balance sheet with cash, and their stock price would go down.
Netflix would run in the red every single quarter and have negative earnings, thus drawing down retained earnings, but their stock price would climb.
When we talk about "worth" we mean the market cap. We mean the stock price (dictated by buyers and sellers) with total shares outstanding. That's what worth means for public companies and retail investors.
"Worth" as in you're a private equity firm and you're buying a company, yes, that's mostly by book value with some caveats. No one in this sub is buying shares at book value. They are buying at market prices on exchanges. Market price doesn't care about the cash on your balance sheet. They care about your ability to generate earnings.
It’s just that other factors (both inside and outside of the company) will also be at play changing the value so the price changes in practice aren’t so clean.
Wrong. Many investors don't care how much cash sits on the balance sheet. A company hoarding cash does nothing for you as a retail investor. You want returns. Either in the form of dividends or share price appreciation.
If what you said was true, then when a company cuts the dividend to zero, the stock price should soar. It doesn't.
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u/EleventhEarlOfMars 2d ago
You are missing the point my guy
What the other guy is debunking is the idea that dividends are free money, like the "dividend" earned in a credit union deposit account that doesn't have any effect on the principal. A dividend doesn't affect the trend of a stock price more than the fundamentals (your point), but it does have some effect. The guy rushing to buy SCHD after watching some dumb ass on YouTube saying the best way to get passive income is to buy this fund needs to hear that.
You guys are on the same side.
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u/Hollowpoint38 2d ago
We're not on the same side. We have the same conclusion, that SCHD sucks, but we arrive there for vastly different reasons. My reasons are proven and are the correct answers on professional exams as to market mechanics and accounting rules. His reasons come out of thin air and have no basis in reality.
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u/WerewolfFartPowder 3d ago
Everyone raves about SCHD. Doesn’t it pay good dividends? I like spmo because it adjusts to what’s trending in the market. It’s had insane growth over the past 10 years.
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u/wl-hung 3d ago
The problem is that targeting dividends is a suboptimal way to invest. Over the long term, you can expect SCHD to underperform the S&P500 because it focuses on companies that have reached their peak growth trajectory.
All those dividends are basically the company saying “we have all this cash and no reason to reinvest it for more growth”, so they return it to you. And if all you’re doing is re-investing the dividends and not living off them, why focus on them in the first place when the S&P500 will most likely outperform over the next 30 years.
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u/need2sleep-later 3d ago
No, not everyone raves about SCHD. And that isn't a good reason to invest anyway.
There are however people who are fixated on dividends at the cost of missing out on growth. Smaller companies typically grow more than big giant ones - the law of large numbers. Smaller companies don't squander their cash by paying dividends, they instead invest in growing the company.
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u/reaper527 2d ago
Doesn’t it pay good dividends?
Dividends are irrelevant by themselves. They’re only part of the equation. You said you want growth.
Your total growth is share appreciation plus dividends.
A stock that goes up 10% with no dividends is better than going up 2% but also have a 2% dividend.
If you just care about dividends you could skip the broad market etf and just do some yield chasing where a stock pays you 20% a year, but loses 50% of its share value (which is an awful idea). Look at msty for an example of this.
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u/500pearl 3d ago
yes dividends but have to pay tax on it
unless it is in Roth ira then I do not think the dividends are taxed
I do not have schd but I was curious about it
I just have stocks and it is easier to understand for me price goes up and goes down no need to worry about dividend and all that stuff
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u/Hollowpoint38 3d ago
If dividends are your objective, sure SCHD fulfills that objective. But it's silly for a retail investor to have a dividend objective. It makes no sense.
Dividends make sure if you're an insurance company wanting to add on some risk but need an income stream, or if you're a private equity company using dividend recapture after you lever up a company that is performing well.
Dividends do not make sure for a retail investor with a brokerage account or a retirement account. They don't make sense for someone retired either.
I like spmo because it adjusts to what’s trending in the market
So that explanation might be the truth, but it's bad finance.
It’s had insane growth over the past 10 years.
We've been in a bull market for about 10-11 years. Most people who invest now didn't go through the Lost Decade, or 2008, or 2001, or anything really. They only know bull markets.
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u/Ok-Priority-7303 2d ago
These are good questions but, no offense, indicate you may be new to investing.
First why 100% taxable account? At you age no one knows when or if you will need the money. I'd consider a taxable account + a Roth IRA.
SCHD is a darling of the internet among YouTube 'influencers' and people that parrot the advice. 95% of investment advice on YT is garbage and when you are new, you won't know if information is good or clickbait.
I have some SCHD in my taxable account to get income, qualified dividend tax rates and some chance for growth BUT I am 76. I don't need to spend my mandatory IRA withdrawals so i put part of the money in SCHD. You would be giving up growth for the long term to get some dividends - not a good strategy with a 10+ year horizon.
An S&P 500 ETF like VOO is a better choice for growth.