Income investors often weigh the merits of individual dividend stocks against diversified ETFs. Two popular choices are Realty Income (NYSE: O) and the Schwab US Dividend Equity ETF (SCHD). Both have strong track records, but they serve different roles in a portfolio. This analysis compares their yields, costs, and performance to help investors make an informed choice.
Realty Income: A Monthly Dividend REIT
Realty Income is a real estate investment trust (REIT) with a market cap of $60 billion. It has raised its dividend for 31 consecutive years, earning it a spot among dividend aristocrats. The company owns freestanding commercial properties leased to tenants like Dollar General, 7-Eleven, and Walgreens under net leases, where tenants cover taxes, insurance, and maintenance. This structure provides predictable cash flow, supported by rent escalation clauses.
Realty Income pays dividends monthly, a feature that appeals to retirees and those seeking regular income. Its current dividend yield is 5%, with no expense ratio since it is a stock, not a fund. The company has grown through acquisitions, including the $9.3 billion purchase of Spirit Realty in 2023 and a $1.7 billion deal for Encore Boston Harbor. It recently formed a $6 billion joint venture with Cloud Capital to invest in hyperscale data centers, committing $1.4 billion for a 45% stake in three Virginia assets.
SCHD ETF: Diversified Dividend Growth
SCHD is one of the largest dividend ETFs, with over $100 billion in assets under management. It tracks the Dow Jones U.S. Dividend 100 Index, investing in companies with consistent dividend payments and growth. The fund excludes REITs, focusing on sectors like healthcare, consumer staples, and technology. Top holdings include Abbott Laboratories, Merck, UnitedHealth, Amgen, Procter & Gamble, and Home Depot.
SCHD charges a tiny expense ratio of 0.03%, making it cost-efficient. It has attracted significant inflows recently, partly due to its reputation as an anti-AI fund, as it avoids high-growth tech stocks. The ETF provides broad diversification, reducing single-stock risk.
Performance Comparison
Over the past year, SCHD has outperformed Realty Income. SCHD's total return year-to-date is 22%, compared to Realty Income's 17.8%. Over five years, SCHD has gained 55%, while Realty Income has risen 22%. This gap reflects SCHD's exposure to sectors that have benefited from economic trends, while Realty Income is tied to real estate market cycles.
However, Realty Income's higher yield and monthly payouts may appeal to investors prioritizing current income over total return. For those seeking steady passive income from REITs, Realty Income remains a strong candidate. Meanwhile, SCHD offers a more diversified approach, with its performance supported by a range of dividend-paying stocks.
Key Considerations for Income Investors
- Yield: Realty Income yields 5%, while SCHD yields around 3.5%.
- Costs: Realty Income has no expense ratio; SCHD charges 0.03%.
- Diversification: SCHD holds over 100 stocks across multiple sectors; Realty Income is a single REIT.
- Risk: Realty Income is exposed to real estate downturns and tenant defaults; SCHD spreads risk across industries.
Investors should also consider broader market conditions. For example, recent shifts in retail investor behavior show a move toward selective trades, which could favor individual stocks like Realty Income. Conversely, rising bond yields may pressure REIT valuations, making SCHD's diversification more attractive.
Ultimately, the choice depends on an investor's goals. Realty Income suits those who want high, predictable monthly income and are comfortable with real estate concentration. SCHD is better for those seeking dividend growth, lower volatility, and broad market exposure. Neither is inherently superior; both can play a role in a well-rounded income portfolio.
This article is for informational purposes only and does not constitute financial advice.
