SCHD vs I-Bonds Calculator

Calculator Settings

Initial Investment Amount ($)

$1,000 $100,000

Investment Period (Years)

1 year 30 years

Expected Inflation Rate (%)

0% 10%

SCHD Expected Annual Return (%)

0% 15%

SCHD Current Dividend Yield (%)

1% 6%

I-Bond Fixed Rate (%)

0% 2.5%

Marginal Tax Rate (%)

0% 37%

Results Summary

SCHD Final Value

$21,589.25

After 10 years

I-Bond Final Value

$13,439.16

After 10 years

SCHD Annual Income

$755.62

Final year dividend income

I-Bond Annual Income

$522.13

Final year interest

SCHD Real Return

4.85%

Inflation-adjusted annual return

I-Bond Real Return

0.90%

Inflation-adjusted annual return

Key Insight

With a $10,000 investment over 10 years and 3% inflation, SCHD is projected to outperform I-Bonds by $8,150.09. However, I-Bonds offer guaranteed protection against inflation, while SCHD carries market risk.

Visualization

Year-by-Year Analysis

Year	SCHD Value	SCHD Income	I-Bond Value	I-Bond Income	Cumulative Inflation

Understanding SCHD and I-Bonds

SCHD (Schwab U.S. Dividend Equity ETF)

SCHD is an exchange-traded fund that tracks the performance of the Dow Jones U.S. Dividend 100 Index. It focuses on high-quality, dividend-paying U.S. stocks with a history of consistently paying dividends.

Key Characteristics:

Current dividend yield: ~3.5%
Low expense ratio (0.06%)
Focus on quality companies with sustainable dividends
Potential for dividend growth over time
Market exposure with associated volatility
No investment limits

Inflation Protection Mechanism:

SCHD may provide inflation protection through:

Companies' ability to raise prices during inflationary periods
Dividend growth that may outpace inflation over time
Capital appreciation potential
Exposure to sectors that may benefit from inflation

I-Bonds (Series I Savings Bonds)

I-Bonds are U.S. Treasury securities designed to protect against inflation. They earn interest based on combining a fixed rate and an inflation rate, adjusted semi-annually based on the Consumer Price Index (CPI).

Key Characteristics:

Current fixed rate: ~0.9% (changes every 6 months for new bonds)
Inflation component adjusted semi-annually
Guaranteed by the U.S. government
No market volatility
Tax advantages (state/local tax exempt, federal tax can be deferred)
Limited to $10,000 per person annually ($15,000 with tax refund)

Inflation Protection Mechanism:

I-Bonds provide direct inflation protection through:

Composite interest rate that includes CPI-linked component
Semi-annual adjustment based on inflation data
Principal value never decreases
Guaranteed real return equal to the fixed rate portion

Inflation Protection Analysis

High Inflation Scenarios

(5%+ annually)

I-Bonds Performance:

I-Bonds excel in high inflation environments, as their semi-annual adjustment directly incorporates CPI changes. The composite rate increases as inflation rises, providing guaranteed protection.

SCHD Performance:

SCHD's performance in high inflation varies based on sectors and companies' ability to pass costs to consumers. Historically, dividend stocks have shown mixed results during high inflation periods.

Winner in High Inflation: I-Bonds offer more reliable, guaranteed inflation protection when inflation rates are high.

Moderate Inflation Scenarios

(2-5% annually)

I-Bonds Performance:

I-Bonds provide consistent protection, with returns closely matching inflation plus the fixed rate component. They maintain purchasing power reliably.

SCHD Performance:

SCHD typically performs well in moderate inflation environments. Many companies can adjust to gradual price increases, and dividend growth often exceeds moderate inflation rates.

Winner in Moderate Inflation: Balanced outcome - I-Bonds provide guaranteed protection while SCHD offers potential for higher total returns.

Low Inflation Scenarios

(0-2% annually)

I-Bonds Performance:

I-Bonds offer lower returns when inflation is low, with composite rates primarily relying on the fixed rate component. Still maintain guaranteed real returns.

SCHD Performance:

SCHD often outperforms in low inflation environments. Companies may benefit from stable input costs, and the dividend yield alone may exceed the inflation rate.

Winner in Low Inflation: SCHD typically provides superior returns when inflation is low, with both income and growth potential.

Critical Inflation Protection Factors

When comparing SCHD and I-Bonds for inflation protection, consider these key factors:

Certainty vs. Potential: I-Bonds offer guaranteed inflation protection, while SCHD provides potential (but not guaranteed) protection with higher return possibilities.
Duration: I-Bonds have minimum holding periods (1 year minimum, 5 years to avoid penalties) while SCHD offers immediate liquidity with market risk.
Investment Limits: I-Bonds are limited to $10,000 per person annually, while SCHD has no investment limits.
Tax Efficiency: I-Bonds offer tax advantages (state/local tax exempt, federal can be deferred) while SCHD dividends are typically qualified but taxable.
Diversification Impact: Consider how each investment fits within your broader inflation protection strategy and overall portfolio.

Historical Performance During Inflationary Periods

Inflation Period	Average Annual Inflation	I-Bond Equivalent Performance	Dividend Stock Performance	Notes
1973-1975	11.3%	~11.3%+ (would have matched CPI)	-1.5% (real return)	High inflation shocked markets
1978-1980	13.5%	~13.5%+ (would have matched CPI)	0.3% (real return)	Dividend stocks struggled
1989-1991	5.1%	~5.1%+ (would have matched CPI)	7.2% (real return)	Dividend stocks performed well
2007-2008	4.2%	~4.2%+ (matched CPI)	-15.8% (real return)	Financial crisis overshadowed inflation
2021-2023	6.2%	6.2%+ (matched CPI)	2.8% (real return)	I-Bonds significantly outperformed

Note: I-Bonds were introduced in 1998, so earlier period data represents theoretical performance based on their inflation-matching design. Dividend stock performance is based on dividend-focused indices and may not exactly match SCHD's specific strategy.

The historical data suggests that I-Bonds (or their theoretical equivalent) provide more reliable inflation protection during sharp inflationary spikes, while dividend stocks like those in SCHD may offer better overall returns during moderate inflation periods and when inflation is accompanied by healthy economic growth.

Income Potential Comparison

SCHD Income Characteristics

Current Income

SCHD currently offers a dividend yield of approximately 3.5%, providing immediate income that typically exceeds I-Bond rates during normal inflation environments.

Income Growth Potential

A key advantage of SCHD is dividend growth over time. The ETF has demonstrated consistent dividend increases, with a 5-year average annual dividend growth rate of approximately 10.5%.

Income Predictability

While SCHD's dividends are not guaranteed, the fund's focus on companies with strong dividend histories provides relative stability. However, during severe economic downturns, dividend cuts remain a possibility.

Income Frequency

SCHD pays dividends quarterly, allowing for regular income distributions throughout the year.

I-Bond Income Characteristics

Current Income

I-Bond rates vary based on inflation. During periods of high inflation, they can provide higher yields than SCHD. During low inflation, yields are typically lower than SCHD.

Income Growth Potential

I-Bond income adjusts with inflation but does not grow beyond inflation plus the fixed rate. There is no compounding growth mechanism beyond inflation adjustments.

Income Predictability

I-Bond income is highly predictable in real terms (purchasing power) but variable in nominal terms as it adjusts with inflation. The real return equals the fixed rate portion.

Income Frequency

I-Bonds accrue interest monthly and compound semi-annually, but interest is only paid when the bonds are redeemed. This makes them less suitable for regular income needs.

Income Example: $10,000 Investment Over 10 Years

SCHD Income Projection

Initial Annual Income: $350 (3.5% yield)
Year 5 Annual Income: $578 (assuming 10.5% dividend growth)
Year 10 Annual Income: $956 (assuming 10.5% dividend growth)
Total Income Over 10 Years: $5,917
Income Growth Rate: 10.5% annually
Real Income Growth: 7.5% annually (assuming 3% inflation)

I-Bond Income Projection

Initial Effective Rate: 3.9% (0.9% fixed + 3% inflation)
Year 5 Annual Income: $463 (accrued, not distributed)
Year 10 Annual Income: $522 (accrued, not distributed)
Total Income Over 10 Years: $4,274
Income Growth Rate: Equal to inflation rate
Real Income Growth: 0% (maintains purchasing power)

Key Income Considerations

SCHD provides higher potential income growth over time, particularly valuable for long-term investors.
I-Bonds offer more predictable income in real terms but lower overall income in most scenarios.
SCHD's income is accessible immediately through quarterly dividends, while I-Bond income is only available upon redemption.
Tax treatment differs significantly between the two investments, affecting after-tax income.

Tax Implications

SCHD Tax Considerations

Dividend Taxation

Most SCHD dividends are qualified dividends taxed at preferential rates:

0% for lower income brackets
15% for most investors
20% for high-income earners

Capital Gains Taxation

Capital gains from selling SCHD shares are taxed at:

Short-term rates (ordinary income) if held less than 1 year
Long-term rates (0%, 15%, or 20%) if held more than 1 year

Tax Location Considerations

SCHD can be tax-efficient in taxable accounts due to qualified dividend treatment, but may also be held in tax-advantaged accounts for complete tax deferral or tax-free growth (Roth).

Additional Taxes

Potential Net Investment Income Tax of 3.8% for high-income earners on dividends and capital gains.

I-Bond Tax Considerations

Interest Taxation

I-Bond interest is:

Exempt from state and local income taxes
Subject to federal income tax (ordinary rates)
Tax can be deferred until redemption or final maturity

Education Tax Exclusion

Interest may be completely tax-free if bonds are used for qualified higher education expenses (subject to income limitations).

Tax Reporting Options

Investors can choose to report interest annually or defer reporting until redemption, providing tax planning flexibility.

No Capital Gains

I-Bonds do not generate capital gains; all returns are treated as interest income.

After-Tax Return Comparison

For a typical investor in the 22% federal tax bracket:

SCHD After-Tax Return Example

Dividend Yield: 3.5%
Tax Rate: 15% (qualified dividends)
After-Tax Yield: 2.98%
Capital Appreciation: ~4.5% annually
Capital Gain Tax: Deferred until sale
Total After-Tax Return: ~7.48% annually

I-Bond After-Tax Return Example

Fixed Rate: 0.9%
Inflation Component: 3.0%
Total Return: 3.9%
Federal Tax Rate: 22%
After-Tax Return: ~3.04%
Real After-Tax Return: ~0.04%

Tax-Optimized Strategies

Short-Term Strategy (1-3 Years)

For short-term goals with high liquidity needs after the first year, I-Bonds may offer tax advantages due to deferral options and state/local tax exemptions.

Mid-Term Strategy (3-10 Years)

A balanced approach may be optimal. Consider I-Bonds for their tax advantages and guaranteed inflation protection, while also holding SCHD in tax-advantaged accounts for growth potential.

Long-Term Strategy (10+ Years)

For long-term horizon, SCHD in a Roth IRA provides tax-free growth and income potential that typically exceeds I-Bonds' returns over extended periods.

Liquidity and Flexibility Comparison

SCHD Liquidity Profile

Trading Availability

SCHD can be bought or sold during any market trading day without restriction, offering immediate liquidity subject only to market conditions.

No Holding Period Requirements

No mandatory holding periods or early redemption penalties, though short-term trading may incur higher taxes and transaction costs.

Market Risk Considerations

While highly liquid, the amount received when selling depends on market price, which may be lower than your purchase price during market downturns.

Dividend Reinvestment Flexibility

Investors can choose to automatically reinvest dividends or receive them as cash, providing flexibility for income or growth objectives.

I-Bond Liquidity Constraints

Mandatory Holding Period

I-Bonds cannot be redeemed for at least 12 months after purchase under any circumstances, creating a complete liquidity lockup for the first year.

Early Redemption Penalty

Redemptions between 1 and 5 years incur a penalty of 3 months' interest, reducing effective returns for shorter holding periods.

Purchase Limits

Annual purchase limits of $10,000 per person electronically (plus potential additional $5,000 via tax refunds) restrict portfolio allocation flexibility.

No Secondary Market

I-Bonds cannot be sold to other investors or traded on secondary markets; they can only be redeemed with the U.S. Treasury.

Liquidity Needs Analysis

Liquidity Need	SCHD Suitability	I-Bond Suitability	Recommendation
Emergency Fund	Poor - Market risk	Poor - 1-year lockup	Neither recommended; use high-yield savings instead
Short-term needs (1-3 years)	Fair - Market risk	Fair - Early redemption penalty	Limited allocation to either, with awareness of constraints
Medium-term needs (3-5 years)	Fair - Market risk	Good - No penalty after 5 years	I-Bonds better if timing is predictable
Long-term needs (5+ years)	Good - Time to recover from downturns	Good - No penalties	Either suitable; allocation based on other factors
Regular income needs	Good - Quarterly dividends	Poor - No regular payments	SCHD preferred for income stream
Opportunistic investing	Good - Can be sold to fund opportunities	Poor - Lockup and redemption constraints	SCHD better for flexibility

Optimal Liquidity Strategy

For an optimal liquidity strategy that balances inflation protection with flexibility:

Tiered Approach: Maintain immediate cash reserves for emergency needs, use SCHD for flexible medium to long-term allocation, and ladder I-Bond purchases for known future expenses.
I-Bond Laddering: Purchase I-Bonds in stages (e.g., quarterly) to create a rolling availability pattern once past the initial 12-month lockup periods.
SCHD Trading Strategy: For planned liquidity needs, consider trimming SCHD positions during market strength rather than being forced to sell during downturns.
Portfolio Rebalancing: Use the more liquid SCHD position for rebalancing opportunities, keeping I-Bonds as a more stable allocation.

Optimal Portfolio Allocation Strategies

Allocation Considerations by Investor Profile

Conservative Investor Profile

Primary Goal: Capital preservation and reliable income

Recommended Allocation

I-Bonds: 50-70%
SCHD: 30-50%

Adjust allocations based on inflation trends:

High Inflation (5%+): Shift toward maximum I-Bond allocation to capture higher composite rates.
Moderate Inflation (2-5%): Balanced allocation between SCHD and I-Bonds based on investor profile.
Low Inflation (0-2%): Favor SCHD for higher return potential when I-Bond composite rates are lower.

Age-Based Strategy

Gradually shift allocation with age:

Early Career (20-40): 80-100% SCHD, 0-20% I-Bonds
Mid-Career (40-55): 60-80% SCHD, 20-40% I-Bonds
Pre-Retirement (55-65): 50-70% SCHD, 30-50% I-Bonds
Retirement (65+): 40-60% SCHD, 40-60% I-Bonds

Market Valuation Strategy

Adjust based on stock market valuations:

High Valuations: Reduce SCHD allocation and increase I-Bond purchases to protect against potential market corrections.
Fair Valuations: Maintain target allocation based on investor profile.
Low Valuations: Increase SCHD allocation to capitalize on higher expected future returns.

Allocation Implementation Example

For a balanced investor with $100,000 to allocate between SCHD and I-Bonds:

Year 1 Implementation

Purchase $10,000 in I-Bonds (annual limit)
Invest $50,000 in SCHD immediately
Dollar-cost average additional $40,000 into SCHD over 6-12 months
Initial allocation: 10% I-Bonds, 90% SCHD

Years 2-4 Implementation

Purchase $10,000 in I-Bonds each year (annual limit)
Rebalance SCHD position as needed
By end of Year 4: Approximately 30% I-Bonds, 70% SCHD
Allocation now matches balanced investor target range

Frequently Asked Questions

How do SCHD and I-Bonds compare for inflation protection?

I-Bonds offer guaranteed inflation protection through direct CPI-linked interest adjustments. SCHD provides potential inflation protection through companies' ability to raise prices and increase dividends, but this protection isn't guaranteed. I-Bonds are more reliable for pure inflation protection, while SCHD offers higher growth potential.

Can I hold both SCHD and I-Bonds in my retirement accounts?

SCHD can be held in any type of investment account, including IRAs and 401(k)s. I-Bonds, however, can only be purchased through TreasuryDirect and cannot be held directly in retirement accounts. This is an important consideration for tax planning and account allocation strategies.

How do the investment limits of I-Bonds affect my allocation strategy?

The $10,000 annual purchase limit per person for I-Bonds (plus potential $5,000 via tax refund) may prevent immediate implementation of your target allocation. This often requires a multi-year approach to building your I-Bond position. For larger portfolios, I-Bonds will necessarily represent a smaller percentage of total assets.

What happens to I-Bonds and SCHD in a deflationary environment?

During deflation, I-Bonds are protected by a "floor" of 0% - they never have a negative composite rate even if CPI is negative. SCHD may face challenges in a deflationary environment as companies struggle with falling prices, potentially affecting dividend sustainability. However, the quality focus of SCHD's holdings provides some resilience.

Should I choose SCHD or I-Bonds if I need regular income?

For regular income needs, SCHD is generally more suitable as it pays quarterly dividends that can be spent immediately. I-Bonds only pay interest when redeemed, making them less convenient for regular income. Additionally, SCHD's dividend growth potential may provide increasing income over time to help keep pace with inflation.

How do changes in interest rates affect both investments?

Rising interest rates typically have a negative initial impact on SCHD's market price, though dividend stocks may adjust over time. For I-Bonds, existing bonds are unaffected by rate changes, but newly issued I-Bonds may have different fixed rates. Higher rates generally make new I-Bonds more attractive relative to existing ones.