SCHD’s Excess CAPE Yield: A Strong Signal for Value Investors
In the ever-evolving world of finance, identifying undervalued investments can be a daunting task. One such investment that has recently piqued the interest of value investors is the iShares Select Dividend ETF (SCHD). According to my analysis, SCHD’s Cyclically Adjusted Price-to-Earnings (CAPE) yield is currently exhibiting an excess yield relative to the S&P 500 (SPY).
What is CAPE Ratio?
Before delving deeper into the significance of this observation, let me first explain the concept of the CAPE ratio. The CAPE ratio is a valuation metric that compares the current price of the stock market or a specific stock to its average earnings over the past 10 years, adjusted for inflation. A lower CAPE ratio indicates that the market or stock is undervalued, while a higher ratio suggests that it is overvalued.
SCHD’s Excess CAPE Yield: A Decade-High Discrepancy
The disparity between SCHD’s CAPE yield and that of the S&P 500 has reached levels not seen in over a decade. According to FactSet data, SCHD’s CAPE ratio currently stands at 16.2, while the S&P 500’s CAPE ratio is at 31.8. This 15.6 percentage point difference is the largest observed since 2011.
Why is this Significant?
This discrepancy is a strong and more reliable signal that SCHD’s yield is too cheaply valued when benchmarked against the overall equity market. The excess yield can be attributed to the ETF’s focus on dividend-paying stocks from sectors with historically higher yields, such as utilities and real estate.
Impact on Individual Investors
For individual investors seeking to add a value component to their portfolios, this could be an opportune moment to consider SCHD. By investing in SCHD, you gain exposure to a diversified portfolio of dividend-paying stocks, which could potentially offer a higher yield than the overall market.
Impact on the World
On a broader scale, this discrepancy could have implications for the global economy. Historically, periods of high market valuations have been followed by extended periods of underperformance. If SCHD’s excess yield persists, it could be an indication that the equity market may be due for a correction. However, it is essential to note that past performance is not indicative of future results.
Conclusion
In conclusion, the excess CAPE yield of SCHD relative to the S&P 500 is a significant development for value investors. This discrepancy, which is the largest observed in over a decade, could be an indication that SCHD’s yield is undervalued when compared to the broader equity market. For individual investors, this could be an opportunity to add a value component to their portfolios. On a larger scale, the excess yield could have implications for the global economy. However, it is essential to remember that past performance does not guarantee future results.
- SCHD’s CAPE yield is currently at a decade-high discrepancy from the S&P 500
- This excess yield is a strong signal that SCHD’s yield is undervalued
- Individual investors could benefit from adding SCHD to their portfolios
- The excess yield could have broader implications for the global economy
- Past performance does not guarantee future results
