Dividend stocks are often regarded as excellent long-term investments. If, for instance, an investor had placed $100 into typical dividend stocks back in 1973, that initial investment would have blossomed into more than $8,700 by the close of 2023, according to research from Hartford Funds and Ned Davis Research. In contrast, non-dividend stocks would have yielded less than $850 over the same period. Moreover, opting for companies that regularly increased their dividends could have boosted those earnings to over $14,100.
Investing in dividend growth companies is a clear winner for many. One straightforward way to tap into these top-performing stocks is through an exchange-traded fund (ETF) tailored towards dividend growth, such as the Schwab U.S. Dividend Equity ETF—traded under the ticker SCHD.
The Schwab U.S. Dividend Equity ETF follows a straightforward strategy: it mirrors the Dow Jones U.S. Dividend 100 index. This index was set up to gauge the performance of high-yield dividend stocks in the U.S., focusing on those with a consistent dividend-paying record, picked for their fundamental strength when measured against peers, thanks to financial ratios.
This index is made up of shares from 100 companies renowned for the quality and sustainability of their dividends. Many of these companies also have outstanding track records of increasing their payouts. A prime example from the ETF’s portfolio is Pfizer, which makes up 4.3% of its net assets. Pfizer, the pharmaceutical powerhouse, has been reliably issuing dividends for 345 consecutive quarters. Just last December, it hiked its dividend further, marking over 15 years of consistent increases. With its present share price, Pfizer offers a yield exceeding 6.5%, significantly higher than the S&P 500’s average of 1.2%.
Another standout in this ETF is Coca-Cola, which ranks as its third-largest holding at 4.1% of assets. The beverage behemoth celebrated its 62nd consecutive year of dividend increases last year, securing its place among the prestigious Dividend Kings—companies that have successfully increased their payouts for over 50 years. Coca-Cola also provides a competitive dividend yield of 3.1%.
Over the years, the Schwab U.S. Dividend Equity ETF’s focus on companies with a history of growing dividends has indeed benefited its investors. Since its inception in October 2011, the ETF has delivered a 12.9% annualized total return, turning a $100 investment into over $500. This stands against the average dividend growth stock which has posted a 10.2% annualized return over the past five decades, as per Ned Davis Research and Hartford Funds.
Currently, the ETF provides an appealing income stream, with a dividend yield of 3.6% based on distributions from the past year. This means that every $100 invested would generate $3.60 in annual dividend income, which is poised to grow as the ETF’s holdings continue to boost their payouts.
For holders aiming for the best growth, reinvesting dividends into more shares of the ETF can speed up both their income stream and their invested capital. When they require income upon retirement, they can halt automatic reinvestments and begin accepting those dividends in cash.
The Schwab U.S. Dividend Equity ETF focuses on top-tier dividend stocks, setting it up to secure above-average total returns over time, particularly considering the historical success of stocks that continually ramp up their payouts. This potent return potential makes it a logical choice for anyone with some spare cash to invest.
