Want Decades of Passive Income? Buy This ETF and Hold It Forever.
Key Points
The Schwab U.S. Dividend Equity ETF has strict criteria for companies to be included in the fund.
Notably, only one technology company sits among this ETF's top 10 holdings.
The ETF has averaged around a 13% annual total return since its October 2011 inception.
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It's always good to get paid for the work you do, but it's even better to get paid while doing nothing, and that's the beauty of passive income. Whether it's rental income, royalties, or dividends, passive income is money that works while you're not working.
Thankfully, passive income in the stock market is as simple as buying a dividend stock or exchange-traded fund (ETF) and holding onto it. It's a way to get rewarded simply for being patient. You don't have to rely only on stock-price growth to make money.
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Not all dividend stocks or ETFs are created equal, though. Some are built for long-term success, like the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). If you're looking for decades of passive income, it's a great go-to fund to consider today.
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SCHD has criteria to help you avoid yield traps
With some dividend ETFs, you have to worry about yield traps (an attractive yield on a bad business) because the ETF is mainly concerned with the yields of the stocks it holds. However, this isn't the case with this Schwab ETF. It only includes businesses with at least 10 consecutive years of dividend increases, a strong cash flow relative to debt, and a high return on equity.
This naturally keeps away subpar businesses that may not have a sustainable dividend. If you're looking for decades of passive income, sustainability is important. Here are SCHD's top 10 holdings and their dividend yields at the time of this writing:
| Company | Percentage of SCHD | Dividend Yield |
|---|---|---|
| ConocoPhillips | 4.82% | 2.62% |
| Lockheed Martin | 4.79% | 2.10% |
| Chevron | 4.70% | 3.48% |
| Verizon Communications | 4.47% | 5.52% |
| Bristol Myers Squibb | 4.22% | 4.20% |
| Altria | 4.13% | 6.39% |
| Merck | 4.08% | 2.90% |
| Coca-Cola | 3.94% | 2.71% |
| Texas Instruments | 3.83% | 2.91% |
| PepsiCo | 3.81% | 2.71% |
Table by author. Dividend yields are as of March 18.
You'll notice that you don't see any big-name tech stocks or young, high-growth stocks. What you do see, however, are stable businesses that make consistent money and have stood the test of time. "Boring" businesses may not make headlines but are often more shareholder-friendly than those that do.
Lucrative returns matched with a lucrative payout
With an average dividend yield above 3% over the past decade, the Schwab U.S. Dividend Equity ETF is an attractive income option (around $30 paid per $1,000 invested annually). However, the real results can come by reinvesting your dividends and then taking cash payouts down the road.
The Schwab U.S. Dividend Equity ETF has averaged 13% annual total returns since hitting the market in October 2011. Past performance doesn't guarantee future performance, but let's assume it continues to average these returns long term. Below is how much investments could grow to in 20 years based on how much you invest monthly:
| Monthly Investment | Investment Value After 20 Years |
|---|---|
| $100 | $96,450 |
| $250 | $241,140 |
| $500 | $482,280 |
| $1,000 | $964,570 |
| $1,500 | $1,446,000 |
Table by author. Investment totals are rounded down to the nearest ten and account for SCHD's 0.06% expense ratio.
At these investment values, you could receive anywhere from $2,893 to $43,380 annually in passive income. Whether you prefer to take cash payouts along the way is your personal choice, but reinvesting dividends adds to the compounding effect.
Should you buy stock in Schwab U.S. Dividend Equity ETF right now?
Before you buy stock in Schwab U.S. Dividend Equity ETF, consider this:
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Stefon Walters has positions in Coca-Cola. The Motley Fool has positions in and recommends Bristol Myers Squibb, Chevron, Merck, and Texas Instruments. The Motley Fool recommends ConocoPhillips, Lockheed Martin, and Verizon Communications. The Motley Fool has a disclosure policy.
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