SCHD Portfolio Drawdown Calculator

For SCHD, drawdowns can be categorized into three general levels of severity:

• Minor drawdowns (5-10%): These occur relatively frequently, approximately 1-2 times per year, and typically recover within 1-2 months. These are generally considered normal market fluctuations.
• Moderate drawdowns (10-20%): These occur approximately once every 2-3 years and typically take 3-6 months to recover. The late 2018 correction (-14.62%) falls into this category.
• Major drawdowns (20%+): These are less frequent, occurring during significant market corrections or crashes, and can take 6-12+ months to recover. The COVID-19 crash (-33.37%) is the most severe drawdown SCHD has experienced since its inception.

Historically, SCHD has experienced fewer and less severe drawdowns than the broader market due to its focus on quality companies with strong fundamentals and consistent dividend histories. However, it's not immune to significant market corrections.

SCHD tends to hold up relatively well during market downturns compared to many other dividend ETFs. Here's how it compares to some popular alternatives during the COVID-19 downturn (Feb-Mar 2020), which represents the most significant recent drawdown:

SCHD's relatively strong performance during drawdowns can be attributed to its quality factor screening, which emphasizes companies with strong fundamentals, consistent dividend histories, and sustainable payout ratios. VIG (which focuses on dividend growth rather than high current yield) showed even better drawdown resistance, while high-yield focused ETFs like DVY experienced deeper drawdowns and longer recovery periods.

SCHD has demonstrated remarkable dividend resilience during market drawdowns, including during the severe COVID-19 crash. This resilience stems from several factors:

• Selection methodology: SCHD specifically screens for companies with 10+ year dividend payment histories and strong fundamentals, selecting stocks with sustainable dividend policies.
• Quality factor emphasis: The ETF focuses on metrics like return on equity, cash flow to debt ratio, and sustainable payout ratios, which correlate with dividend stability during downturns.
• Quarterly rebalancing: SCHD's methodology allows it to adjust holdings as conditions change, potentially reducing exposure to companies at higher risk of dividend cuts.

During the COVID-19 pandemic, when many companies cut or suspended dividends, SCHD's dividend actually increased by 1.7% from Q1 2020 to Q2 2020, and by 11.6% for the full year 2020 compared to 2019. This demonstrates the ETF's ability to maintain income even during severe market stress.

However, it's important to note that no dividend strategy is completely immune to cuts in extreme scenarios. During the 2008-2009 financial crisis (before SCHD existed), many traditionally reliable dividend payers reduced their dividends. While past performance suggests SCHD's screening criteria would have provided significant protection, severe economic shocks can still impact dividend payments.

Based on historical performance analysis, the most effective strategies for handling SCHD during market drawdowns include:

1. Maintain and reinvest (most reliable): Simply holding your position and reinvesting dividends has consistently proven effective. This approach takes advantage of dollar-cost averaging by automatically buying more shares at lower prices during drawdowns.
2. Strategic DCA (highest potential return): Increasing your regular contributions during drawdowns can significantly improve long-term returns and accelerate recovery. Even modest increases in contribution amounts during market corrections can have outsized impacts on long-term performance.
3. Cash buffer deployment (most flexible): Maintaining a strategic cash reserve (5-10% of portfolio) that can be deployed during significant drawdowns provides flexibility without compromising long-term investment objectives.
4. Sector rotation (most complex): For more active investors, tactically adjusting allocations between SCHD and complementary ETFs based on market conditions can potentially reduce drawdown severity while maintaining income focus.

The least effective strategy is panic selling during drawdowns, which locks in losses and prevents participation in the recovery phase. Historical analysis shows that selling SCHD during major drawdowns and attempting to time re-entry has consistently led to worse outcomes than simply maintaining positions.

For most investors, particularly those with a long-term income focus, the optimal approach is a combination of the first two strategies: maintaining positions, reinvesting dividends, and increasing contributions during significant drawdowns when possible.

Inflation affects SCHD's drawdown recovery in several important ways:

• Real vs. nominal recovery: In high inflation environments, the time to nominal price recovery (returning to pre-drawdown dollar value) may understate the time needed for real recovery (regaining pre-drawdown purchasing power). For example, with 5% annual inflation, a 12-month nominal recovery actually represents a real drawdown that's still approximately 5% below the starting value.
• Dividend growth advantage: SCHD's focus on companies with histories of growing dividends provides a significant advantage during inflationary periods. Historically, SCHD's dividend growth rate (averaging 11.44% over recent 5-year periods) has substantially outpaced inflation, helping to maintain and grow real income during and after drawdowns.
• Sector composition impact: SCHD's sector allocation includes significant exposure to companies with pricing power (ability to pass inflation costs to consumers), which typically perform better during inflationary periods than the broader market. This characteristic can potentially accelerate real recovery during inflation-driven market corrections.

For retirement planning purposes, inflation-adjusted drawdown analysis is particularly important. While SCHD may recover its nominal value within a certain timeframe, the real recovery time (accounting for purchasing power) might be longer. This calculator allows you to toggle between nominal and inflation-adjusted values to better understand the true impact of drawdowns on your retirement income potential.