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SCHD ETF vs US Treasuries: Which is a better investment?

By: Invezz

Income-focused investors have a choice to make when allocating capital this year. Some investors are opting to move their cash to US Treasuries, which are delivering strong returns amid the stubbornly high inflation. The 10-year Treasury Note is yielding 4.6% while the 3-month and 6-month notes are yielding 5.36%.

On the other hand, the much-beloved Schwab US Dividend Equity ETF (SCHD) has a yield of about 3.4%. Other high-yield stocks like Realty Income (O), VICI Properties (VICI), and Energy Transfer (ET) has a yield of 7.95% and its stock is up by over 14% this year. 

Fed may not cut rates after all

The key reason why US Treasury yields are soaring is that inflation in the US has been stubbornly high this year. Data released in April revealed that the headline Consumer Price Index (CPI) rose to 3.5% in March while the Personal Consumption Expenditure (PCE) inflation rose to 2.5%. 

These numbers imply that US inflation is taking longer than expected to move to the Fed’s target of 2.0%. As such, the Fed will likely have two choices to make this year. First, it could decide to maintain rates steady at the current level for a while.

Second, some analysts believe that the Fed will hike rates again. This is highly unlikely because there are signs that the economy is softening. Data released last week revealed that the economy expanded by just 1.6% in the first quarter, a big decline from the previous quarter.

Also, the Fed will not hike because we are in an election year. Hiking before the election will be a sign of political interference. The same is true with a rate cut, especially when it happens after July.

Therefore, I believe that investors in short-term US government bonds will receive free money. Keep in mind that these bonds have a better return that is higher than inflation, which is a positive thing.

Is the SCHD a better alternative?

The SCHD is often seen as the best dividend ETF in the US, which explains why it has accumulated over $53 billion in assets. Vanguard High Dividend Yield Index (VYM), its close competitor has over $67 billion in assets. 

The SCHD has a strong track record. It has had a total return of 68% in the past five years. Recently, however, its total return has not been encouraging. It has risen by just 9.05% in the past 12 months and by 1% this year.

The main difference between the SCHD ETF and US Treasuries is that it has a strong record of divided growth. Its CAGR in the past five years has been 11.8%, higher than the VYM’s 5.22%. Growth is not something you expect when investing in US government bonds.

Also, the SCHD is being supported by strong earnings. Data by FactSet shows that 77% of the 46% of the S&P 500 index companies that have published their earnings have beaten their analysts’ estimates. 

These companies have reported a blended earnings growth of 3.5%, the third-straight quarter of growth. Therefore, there is a likelihood that US equities will continue doing well in the near term as earnings rise.

Therefore, as I have written before, the SCHD is a good ETF to invest in if you are looking for dividend growth. However, based on the past performance, traditional ETFs like Invesco QQQ and SPDR S&P 500 (SPY) have demonstrated strong returns.

As such, in addition to these mainstream ETFs, it makes some sense to add some money in SCHD and short-term Treasuries. The risk for investing in these Treasuries is that the Fed may sound dovish, leading to a lower yield. You will then need to pay taxes as you rotate from bonds to stocks.

The post SCHD ETF vs US Treasuries: Which is a better investment? appeared first on Invezz

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