Love the SCHD ETF? USA is a great 10% yielding alternative

The Schwab US Dividend Equity ETF (SCHD) stock price rose for five consecutive days and was trading at $84.15, a few points below its all-time high of $84.56. It has jumped by 12% this year while its total return stood at over 18%. 

The Liberty All-Star Equity (USA) fund is doing even better as its stock has jumped by 9.87% while its total return was 18.90%. It has even beaten the closely watched Invesco QQQ (QQQ) and the SPDR S&P 500 (SPY) exchange traded funds, whose total return stood at 15% and 16%.

Federal Reserve boost

American stocks have done well this year, helped by the rising expectations that the Federal Reserve will start to cut interest rates in its first meeting.

The Fed will start its two-day monetary policy meeting on Tuesday and then deliver its interest rate decision on Wednesday.

Economists agree that the bank will start slashing rates in this meeting. Most of them expect either a 0.25% or a 0.50% cut while Senator Elizabeth Warren is pushing for a giant 0.75% cut. 

The Fed typically cuts rates by such a big number when there is an economic emergency. In today’s case, however, the economy is doing well, with inflation falling and the labor market being tight.

Interest rate cuts will likely pull investors back to American stocks. Besides, many of these investors have stashed over $6.1 trillion of assets in high-yielding money market funds. 

The other catalyst for the SCHD ETF and the USA Fund is that corporate earnings have been relatively strong. A report by FactSet shows that companies had earnings growth of over 10% in the second quarter.

Its estimated earnings growth for the third quarter for companies in the S&P 500 index will be 4.9%. If this estimate is correct, it will mark the fifth consecutive quarter of earnings growth. 

Historically, stocks tend to do well when the Fed is cutting interest rates. For example, equities erased gains made in March 2020 and then surged to a record high during the pandemic.

SCHD is a great fund for dividend investors

The SCHD has emerged as one of the best ETFs for investors focused on dividends. Its performance has been notable because it has not been driven by technology companies. Instead, it is mostly made up of companies in traditional industries like financials, healthcare, consumer staples, and industrials. Tech companies make up less than 10% of the fund. 

Some of the biggest companies in the fund are Lockheed Martin, AbbVie, Home Depot, Blackrock, and Coca-Cola. It also has significant stakes in firms like Amgen, Verizon, and Bristol Myers Squibb. 

The fund has done well over the years. Its worst year ever was in 2018 when it had a negative return of 5.56%. It then dropped by 3.23% in 2022 and 0.31% in 2015. In these three years, the S&P 500 dropped by 4.56%, 18%, and 0.2%, respectively.

Its total return in the last five years was 81.20%, underperforming the S&P 500 and Nasdaq 100 indices that rose by 102% and 155%. SCHD has a dividend yield of 3.40% and a 10-year compounded annual growth rate of 11%, higher than the sector median of 6.28%.

Liberty All-Star Equity Fund | USA

The Liberty All-Star Equity Fund (USA) is another great alternative for SCHD ETF fund. It has a dividend yield of 10.42%, meaning that a $100,000 invested in the fund will bring a gross return of over $10,000. 

There are two primary differences between the SCHD and USA funds. First, SCHD is an exchange-traded fund that tracks companies in the Dow Jones 100 index. Liberty All-Star Equity Fund is a closed-end fund (CEF) that tracks companies and applies some leverage.

Second, there is a difference in their composition. The biggest component of the USA fund is the financials, which accounts for 21.22% of assets followed by information technology, healthcare, consumer discretionary, and industrials, which account for 21.18%, 13.07%, 12.20%, and 7.9%, respectively. 

The biggest companies in the fund are Microsoft, Alphabet, Amazon, UnitedHealth, NVIDIA, Visa, Servicenow, and S&P Global. Its top 20 companies account for about 33% of the fund, making it more diversified. 

An additional difference is that the USA Fund is actively managed, meaning that the manager buys and exits positions regularly. Some of the most recent purchases were Baxter, Novo Nordisk, O’reilley Automotive, and Skyworks Solutions.

The USA Fund has done well over time, with its total return being 80% compared to S&P 500’s 102.8%. Most notably, the fund constantly trades at a discount to its net asset value (NAV), meaning that the spread may narrow when the Fed starts to cut rates.

The main con for investing at the USA Fund is that it is relatively expensive, with an expense ratio of 1.01%, which is massive. In contrast, the SCHD fund costs just 0.06%.

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