Got $5,000? This Dividend ETF Could Be a No-Brainer Buy

Key Points

• Investing in an exchange-traded fund can drastically reduce risk for income investors.

• This Schwab ETF invests in dividend stocks with safe and sustainable payouts.

• Its high yield and low expense ratio make it a great option for long-term investors.

• 10 stocks we like better than Schwab U.S. Dividend Equity ETF ›

If you have $5,000 you can afford to invest in the stock market, a good option is to put that money into an investment that can generate recurring dividend income, while also having the potential to rise in value in the long run. That can put your money to work in multiple ways, potentially accumulating gains over time while also generating some good cash flow for your portfolio.

Exchange-traded funds (ETFs) can be excellent options to consider because they can give you a balanced investment into many stocks, possibly even hundreds or thousands of them. That means you don't have to worry about how individual stocks are doing.

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From a dividend investor's point of view, that also means you don't have to worry about the dreaded risk that a company will announce a dividend cut or suspension. I've been there, and even investing in seemingly safe dividend stocks can still end up with disappointment later on. The best way to protect yourself against that is with a well-diversified dividend ETF.

A great option is the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD).

Image source: Getty Images.

The Schwab U.S. Dividend Equity ETF offers a terrific yield

One of the most appealing features of this Schwab fund is undoubtedly its high dividend yield. At 3.7%, that's a far higher payout than what you'd collect if you simply tracked the S&P 500, as its average yield is just 1.2%.

To put that into perspective, if you invested $5,000 into the ETF today, you could expect to collect approximately $185 in dividends over the course of an entire year. In comparison, however, a $5,000 investment in an ETF tracking the S&P 500 would only generate $60 per year, given the index's low yield.

What's great is that, because the fund invests in around 100 stocks, your eggs aren't all in one basket and dependent on one or even a couple of high-yielding stocks.

The fund focuses on safe dividend stocks and keeps its fees minimal

The Schwab U.S. Dividend Equity ETF tracks the Dow Jones U.S. Dividend 100, an index that prioritizes quality and sustainability when it comes to dividends. It isn't simply adding high-yielding stocks into its portfolio. Some of the big names in the Schwab portfolio include Verizon Communications, PepsiCo, and Chevron. These are blue chip dividend stocks that are known for not only regularly paying dividends, but also for growing their payouts over time. Not every stock will have the same robust background, but it's a good indication of the quality of the dividend stocks the fund is invested in.

Another solid feature of the fund is that its expense ratio is just 0.06%. That means if you invested $5,000, your annual fees from holding the ETF would be just $3. That's less than the price of a cup of coffee in most places, and in exchange, you get an investment with a diversified position in some of the best dividend stocks in the world.

A great ETF to buy and forget about

The Schwab U.S. Dividend Equity ETF isn't a high-powered growth investment, but it can be a dependable investment to hold in your portfolio for many years. When the market was in turmoil in 2022 and the S&P 500 crashed, this Schwab fund's total returns (which include reinvested dividends) were a negative 3%. That's a far cry from the performance of the broad index, which lost 18% in value.

This year it's been a different story, with the Schwab U.S. Dividend Equity ETF's total returns coming in at just 2% versus nearly 14% for the S&P 500. That's the trade-off that you often need to take when opting for safety and security. You'll sacrifice some gains when times are good, but in return, you can minimize your losses when times are tough.

Along the way, you can still collect an above-average dividend from this ETF without incurring significant fees. That's why the Schwab U.S. Dividend Equity fund can be a suitable option to hang on to for the long haul.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.