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The central bank caused a major ruckus last week by nonchalantly signaling an end to its one-and-a-half year interest rate hiking cycle causing euphoria in the market and having passive income investors ask themselves what kind of investment to prioritize in a changing market.
I think two kinds of investments could be doing great in 2024 as the market grapples with the prospects of lower short-term interest rates:
- Dividend-focused exchange-traded funds like the Schwab US Dividend Equity ETF (NYSEARCA:SCHD) which has a robust return history and has produced positive investment returns for investors in both high-yield and low-yield markets; and
- Mortgage real estate investment trusts that own a boatload of mortgage-backed securities.
My Rating History
I called the Schwab US Dividend Equity ETF a bet on America a while back because the ETF’s portfolio included some of the largest names in the U.S. economy.
Furthermore, with short-term interest rates primed to get slashed in 2024, I think investment vehicles with proven performance records during both high and low-rate environments are preferred investment choices for passive income investors as a new paradigm takes hold.
Schwab US Dividend Equity ETF Is A Bet On High-Yield As Well As Low-Yield Markets
The real value with passive income investments is not reflected in their high yields, but in their ability to deliver consistent results independent of the market situation. Over time, passive income investments (and the companies that issue them, will have to prove themselves in whole array of different markets that either sport low or high interest rates as well as low or high economic growth rates.
With that being said, the Schwab US Dividend Equity ETF has delivered a rather poor performance in 2023: The ETF’s price on Friday was $75.45 which is essentially the same price the SCHD closed at on the first day of trading in 2023: $75.44.
However, particularly with ETFs, which don’t lend themselves to trading, a long-term view of the Schwab US Dividend Equity ETF’s performance history in order as such a broader perspective (a decade plus) will inevitably include periods of lower interest rates and mixed (both high and low) GDP growth rates.
In the last ten years, the Schwab US Dividend Equity ETF has produced an impressive 10.6% yield on both its market price and its net asset value which suggests that the ETF is also a suitable passive income investment during periods of low interest rates, a period that we are heading towards once again.
Market Price And NAV (Schwab US Dividend Equity ETF)
SCHD Is A Recession-Proof Yield Play For Passive Income Investors
The key reason to own the Schwab US Dividend Equity ETF in a portfolio is the potential for recurring income as well as a compounding potential. Passive income investors that really want to profit from the principles of compounding and that are not retirees yet, may want to choose to reinvest as much of their dividend income as possible. Presently, the Schwab US Dividend Equity ETF offers passive income investors a 3.5% dividend yield that is paid monthly.
Schwab US Dividend Equity ETF Is Selling At Net Asset Value
As an exchange-traded fund is traditionally valued based on net asset value and the discounts/premiums that can be witnessed in the market, as opposed to closed-end funds, are typically small. The last reported net asset value for the Schwab US Dividend Equity ETF was $75.53 which reflected a net asset value premium of only 0.01%.
NAV Premium (Schwab US Dividend Equity ETF)
What Are Some Of The Risks That ETF Investors Need To Consider
Though the Schwab US Dividend Equity ETF has historically delivered quite competitive double digit investment returns based on market price and net asset value, there is no guarantee that SCHD will be able to produce comparable performance results in the future.
Furthermore, there is no guarantee that the ETF’s investment style relating to dividend-focused investing will outperform or deliver superior results relative, for instance, a growth-focused ETF.
Schwab US Dividend Equity ETF is primarily a suitable investment for investors that are concerned with owning a diversified portfolio of high-quality U.S. companies that pay a high regular dividend or are growing their dividend pay-outs over time.
My Conclusion
For the first time since the beginning of 2022, investors are dealing with a new paradigm: The central bank is no longer hiking interest rates in an attempt to counteract inflation, but will rather return to its secondary policy objective of stimulating economic growth in the U.S. economy by setting a lower key interest rate.
I can see two kinds of investments do well in 2024: Those (mortgage) real estate investment trusts that either own a lot of mortgage-backed securities or floating-rate debt and dividend-focused exchange-traded funds with a history of performing well even during periods of low interest rates, like the Schwab US Dividend Equity ETF.
