If You Invest $5,000 in SCHD Today, Here's the Passive Income It Could Deliver in 20 Years
Key Points
The Schwab U.S. Dividend Equity ETF offers a high current yield.
It has also historically grown its dividend payments at a high average annual rate.
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The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is one of the most popular dividend-focused exchange-traded funds (ETFs). That's due to its combination of a high current yield (around 3.3%) and a strong dividend growth rate (an 11.2% compound annual growth rate since 2017).
Here's a look at how much passive income a $5,000 investment in this ETF could deliver in 20 years.
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Image source: Getty Images.
More and more income
Investing $5,000 into the Schwab U.S. Dividend Equity ETF would generate $162.50 of annual dividend income at the ETF's trailing 12-month yield of 3.25%. The ETF would deliver $3,250 of cumulative dividend income if it maintained its current rate for the next 20 years.
That's likely an extremely conservative estimate, given that dividend growth is one of the hallmarks of this ETF. It tracks an index that screens companies based on four dividend-quality characteristics, including the five-year dividend growth rate. That dividend growth focus is why this ETF has grown its payout at an 11.2% compound annual rate since 2017.
The index reruns its screens once a year and reconstitutes its holdings based on those findings. After its last reconstitution in March, the post-reconstituted holdings had delivered an average annual dividend growth rate of 9.4% over the last five years. That's an acceleration from the 8.6% five-year average growth rate of its holdings before the changes.
To be conservative, we'll assume an average annual dividend growth rate of 9% over the next 20 years. Here's how much dividend income a $5,000 investment would produce if we also assume a 3.25% starting yield and no dividend reinvestment:
Chart and data source by the author.
That adds up to a cumulative $8,313.52 in dividend income by the end of year 20. By that year, the $5,000 investment would be generating $835.52 in annual dividend income, growing the yield on cost to 16.7%. This projection shows just how powerful dividend growth can be over the long term, which is why SCHD is such an excellent ETF to buy and hold.
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Matt DiLallo has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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