Schwab's Dividend ETF's Worst Year Since 2012 Was a 5.5% Loss. The Cost Showed Up in the Good Years.

Between 2012 and 2025, the Schwab U.S. Dividend Equity ETF (NYSEMKT:SCHD) ended just three calendar years in the red, including the dividends it paid. And none of those losses were big. Its worst year, 2018, was a drop of around 5.5%.

That sort of record is a big reason income investors like the fund. In 2022, when the S&P 500 (SNPINDEX:^GSPC) dropped around 18% counting dividends, the dividend ETF lost only about 3%.

But I don't think the number of losing years is what sets it apart. The S&P 500 was down in just two of those same 14 years.

What stands out is how shallow the fund's bad years were -- and how much that has cost in the good ones.

Image source: The Motley Fool.

Shallow losses

Schwab's published yearly returns show the three losing years were 2015, 2018 and 2022. The 2015 loss hardly counts, because the fund dipped just 0.2% in a year the S&P 500 climbed around 1.4%.

In 2018, the fund's 5.5% fall was slightly worse than the S&P 500's 4.4% drop.

In other words, in two of its three losing years, the fund didn't hold up any better than the overall market. The year that arguably made its reputation was 2022.

It's also worth knowing that a full-year return can hide a rough spell in the year. The fund's worst quarter was in the first three months of 2020, when it dropped around 22%. It still ended 2020 up about 15%.

Why did 2022 go so differently?

The answer starts with what the fund is allowed to own. It tracks the Dow Jones U.S. Dividend 100 Index, which only looks at companies with at least 10 straight years of dividend payments. From this group, the index chooses high-yielding stocks that score well on cash flow relative to total debt, return on equity, dividend yield and five-year dividend growth.

This rule left some of 2022's biggest losers out completely. Amazon, Tesla and Meta Platforms didn't pay dividends that year. Their stocks dropped around 50%, 65% and 64% in 2022, respectively.

The fund's holdings still tilt the same way now. As of June 30, healthcare and consumer staples (businesses people usually keep paying for in a downturn) made up around 41% of the fund. Tech stocks made up only about 9%, compared with about 37% for the broader Schwab U.S. Large-Cap ETF.

Also, the dividend fund's holdings were cheaper, at around 20 times earnings as of Aug. 31. The large-cap fund's holdings were at around 25 times earnings.

Smaller losses haven't come free

The same mix that softened 2022 has held the fund back in rising markets. From 2023 through 2025, the dividend ETF returned around 5%, 12% and 4% while the S&P 500 returned about 26%, 25% and 18%. Compounded, that's a total gain of about 22% for the fund during those three years, versus about 86% for the index.

Even with 2022's smaller loss, the index finished well ahead. The fund's total gain from 2022 through 2025 was around 18%, but the S&P 500's was about 52%.

And over all 14 years, $10,000 in the fund would have turned into about $49,000 with dividends reinvested. The same amount in the S&P 500 would have hit around $70,500.

2026 has gone the other way

As I write, the fund is up around 24% in 2026 with dividends, but the S&P 500 is up about 14%. The fund has topped a rising S&P 500 in just three full years since 2012 -- 2013, 2016 and 2021.

However, a good part of that lead seems to come from energy. Energy stocks were around 14% of the fund as of June 30. Chevron and ConocoPhillips, two of its 10 biggest holdings, have each gained over 40% this year with dividends. Its largest holding, Texas Instruments, is up almost 70%.

Of course, a lead based on oil stocks and a few big winners might not last. And the fund's longer history suggests strong markets usually favor the index.

In the end, the fund's strength has been how little it lost in its bad years, not how rarely it lost. I think the fund can make sense for investors who value a smaller drop in a tough year and a steady flow of dividends. But I'd pair it with a broad index fund, because the past 14 years show how far it can lag when the market is rising.

Daniel Sparks has clients with positions in Tesla. The Motley Fool has positions in and recommends Amazon, Chevron, Meta Platforms, Tesla, and Texas Instruments. The Motley Fool recommends ConocoPhillips. The Motley Fool has a disclosure policy.