Dividend ETF Beating S&P 500 by 16% YTD Without Owning Magnificent Seven Stocks

The Schwab U.S. Dividend Equity ETF (SCHD) has generated a 28.99% cumulative return through September 1, outperforming the SPDR S&P 500 ETF Trust (SPY) by nearly 17 percentage points. This impressive performance is particularly noteworthy given that SCHD does not own a single Magnificent Seven stock, which have dominated market performance in previous years.

Investors have been discussing a potential style rotation in the market, with large-cap growth stocks weakening in leadership and small-cap and value stocks taking over more of the market's momentum. The Schwab U.S. Dividend Equity ETF has been a major beneficiary of this trend, providing multifaceted exposure to both quality and value factors through its screening methodology.

How SCHD Selects Companies

SCHD tracks the Dow Jones U.S. Dividend 100 Index, which begins by requiring eligible stocks to have at least 10 consecutive years of dividend payments. The heavier lifting comes from a composite score based on four fundamental variables:

  • Free cash flow to total debt: Measures how much cash a company generates relative to its debt burden.
  • Return on equity: Measures how effectively a company generates profits from shareholders' equity.
  • Dividend yield: Measures annual dividends relative to the stock price.
  • Five-year dividend growth rate: Rewards companies that have consistently increased their payouts rather than merely maintaining a high current yield.

The 100 highest-ranked stocks ultimately form the index, providing a diversified portfolio of high-quality dividend-paying companies.

Key Differences Between SCHD and SPY

One of the most interesting things about SCHD is how little it resembles the market it has been beating. According to the ETF Research Center, SCHD has just 8% overlap by weight with SPY, with 46 stocks appearing in both portfolios. SCHD owns none of the Magnificent Seven companies that have driven so much of the S&P 500's performance in recent years.

The sector allocations help explain the difference. SPY has approximately 28 percentage points more exposure to technology than SCHD. Meanwhile, SCHD has substantial allocations to areas including consumer staples at 14.9%, healthcare at 12.2%, and energy at 12.1%. These sectors tend to contain mature businesses generating substantial free cash flow while trading at lower valuations than the largest technology and growth companies.

Why Dividend ETFs Matter

While total return ultimately matters more than yield, a dividend screen can serve a second purpose. When combined with profitability, leverage, and dividend-growth metrics, as SCHD does, it becomes a relatively inexpensive way of obtaining systematic exposure to quality and value. At 0.06% annually, SCHD provides that factor exposure for considerably less than many specialized smart-beta ETFs, while its 3.15% SEC yield provides some additional income along the way.

Whether this year's rotation continues is impossible to know. Factor leadership can reverse quickly, and SCHD will inevitably experience periods when growth-heavy benchmarks outperform it again. However, 2026 has provided a good example of why maintaining exposure to fundamentally different parts of the market can pay off.

For investors looking to diversify away from the S&P 500's growth and technology concentration, the Schwab U.S. Dividend Equity ETF provides a relatively inexpensive way to do so. With its 0.06% expense ratio and 3.15% 30-day SEC yield, SCHD is an attractive option for those seeking a high-quality dividend-paying portfolio.