$10,000 Invested in SCHD a Decade Ago Would Be Worth This Much Today

Ten years ago, $10,000 might not have seemed like enough money to produce meaningful passive income. By investing it in the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD), shareholders found that wouldn't be the case.

Over the past 10 years, a hypothetical $10,000 investment in this fund would have grown to $34,400, assuming dividends and capital gains were reinvested. That's a $24,400 gain without contributing a single additional dollar.

That's impressive for an exchange-traded fund primarily known for producing dividends. More importantly, it illustrates why dividend investing doesn't necessarily require choosing between generating income and building wealth.

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SCHD turned $10,000 into more than $34,000

The Schwab U.S. Dividend Equity ETF has generated a 13.1% annualized return over the past 10 years. Those returns resulted in the original $10,000 growing into roughly 3.4 times the initial investment.

That performance puts the fund in the top quartile of Morningstar's Large Cap Value category.

Past performance, of course, doesn't guarantee future returns over the next decade. But the Schwab U.S. Dividend Equity ETF's results demonstrate something very important for investors: a dividend strategy can deliver significant capital appreciation alongside a steady, predictable income stream. The dividends are actually an important reason why.

Reinvested dividends can create a powerful compounding component

The fund's strategy isn't focused solely on making quarterly dividend payments.

For investors who don't need the income today, reinvesting those dividend distributions buys additional shares. Those additional shares can then generate further dividends, which can purchase still more shares. That snowball effect becomes increasingly powerful as this process continues over time.

That can be one of the most attractive catalysts for long-term investors.

Someone investing $10,000 today doesn't have to immediately turn the Schwab U.S. Dividend Equity ETF into a source of regular income. If your time horizon is 10, 20, or 30 years or more, you can spend decades using those dividends to accumulate significantly more shares before transitioning to using the fund as an income generator.

The reason that SCHD's strategy has worked

This fund's success isn't simply the result of buying stocks with high yields.

Its underlying index starts with companies that have paid dividends for at least 10 consecutive years. It then evaluates qualifying stocks using their dividend yield, five-year dividend growth rate, return on equity (ROE), and free cash flow relative to debt. The fund currently offers a 3.2% dividend yield.

Those screens matter because a high yield alone isn't particularly valuable if the underlying business can't sustain it. Just take a look at what happened to Campbell's earlier this month!

The Schwab U.S. Dividend Equity ETF instead seeks companies offering attractive yields and demonstrating the financial strength to sustain and grow dividends indefinitely. That combination can produce multiple sources of return. Growth within the businesses can push share prices higher, while dividends can provide immediate returns to shareholders. Dividend increases can also grow the income stream over time. Reinvesting those dividends can accelerate compounding even further.

For long-term investors, this ETF offers the opportunity to spend years building wealth and passive income simultaneously. Its focus on the aspects of dividend growth, dividend quality, and high yield in a single ETF is fairly unusual, and this fund does it as well as any.

The best path is to keep contributing to your investments, reinvest dividends, and let the long-term power of compounding do much of the work for you. Eventually, investors can transition from contributing to using those distributions for monthly expenses.

The goal of the Schwab U.S. Dividend Equity ETF should be to build an income-producing asset that can grow considerably over the years and decades.

David Dierking has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool recommends Campbell's. The Motley Fool has a disclosure policy.