The S&P 500's Dividend Yield Hasn't Been This Low Since the 1800s. That Makes This Top Dividend ETF Even More Enticing.
Key Points
The Schwab U.S. Dividend Equity ETF's current yield is triple that of the S&P 500.
The ETF's holdings are also growing their dividends faster than the S&P 500.
The fund has delivered strong total returns over the years.
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Companies have de-emphasized dividend payments over the years, opting to retain more cash to reinvest in their businesses and repurchase shares. Combine that with rising stock prices, and the S&P 500's dividend yield has fallen to around 1%. That's its lowest level since the 1800s.
As a result, investing money into an exchange-traded fund (ETF) tracking the S&P 500 isn't going to generate much dividend income these days. That makes the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) even more enticing right now. It offers a much higher dividend yield while also delivering strong total annual returns.
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A lot more dividend income
The Schwab U.S. Dividend Equity ETF has a simple strategy. It tracks the Dow Jones U.S. Dividend 100 Index. That index aims to measure the performance of high-yielding dividend stocks with a consistent dividend record. The index screens companies based on several dividend quality characteristics, including yield, five-year dividend growth rate, and financial strength. It holds roughly 100 high-yielding dividend stocks and reconstitutes its holdings once a year to ensure it holds the best high-yielding dividend stocks.
The ETF pays a dividend each quarter. The fund currently has a 3.2% dividend yield based on its payments over the last 12 months and recent share price. To put that into perspective, investing $10,000 into the Schwab U.S. Dividend Equity ETF would generate about $320 in annual dividend income at its current rate. For comparison, investing $10,000 into a top S&P 500 ETF like the Vanguard S&P 500 ETF would generate only about $100 in dividend income each year at the index's current yield.
The Schwab U.S. Dividend Equity ETF's holdings tend to increase their dividends each year. Over the last five years, they've grown their dividends by an average annualized rate of 9.4%. That's faster than the S&P 500's 6.3% dividend growth rate during that period. As a result, the fund's dividend payments should continue to rise:
SCHD Dividend data by YCharts
Dividends are only part of the return
The Schwab U.S. Dividend Equity ETF isn't only an income story. The fund has also historically delivered strong total returns. That's due to its dual focus on both dividend yield and growth. Historically, dividend growth stocks have delivered the highest total returns among stocks by dividend policy:
|
Dividend policy |
Average annual total returns |
|---|---|
|
Dividend growers & initiators |
10.2% |
|
Dividend payers |
9.2% |
|
No change in dividend policy |
6.9% |
|
Dividend cutters & eliminators |
-1% |
|
Dividend non-payers |
4.2% |
|
Equal-weighted S&P 500 index |
7.7% |
Data source: Ned Davis Research and Hartford Funds.
A company needs to steadily grow its earnings to deliver sustainable dividend growth. Earnings growth tends to drive long-term stock price appreciation. This growth-driven appreciation, along with a rising stream of dividend income, helps drive the higher total returns of dividend growth stocks over the long term.
The Schwab U.S. Dividend Equity ETF's focus on higher-yielding dividend growth stocks has contributed to its strong returns over the years:
|
Fund |
1-Year |
3-Year |
5-Year |
10-Year |
Since its inception in 2011 |
|---|---|---|---|---|---|
|
Schwab U.S. Dividend Equity ETF |
29.00% |
14.03% |
9.06% |
12.88% |
13.28% |
The fund should continue to deliver robust total returns going forward, thanks to its focus on higher-yielding stocks that are still growing at above-average rates.
A great ETF to buy in today's lower-yielding environment
The S&P 500 hasn't offered a dividend yield this low since the 1800s. That index's paltry yield makes the Schwab U.S. Dividend Equity ETF look even more attractive these days. It offers a much higher current yield, backed by companies that have been growing their payouts faster in recent years. That positions the fund to continue generating strong total returns for investors while also delivering more dividend income. The ETF's income and yield combo make it a great long-term investment right now.
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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Matt DiLallo has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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