The Dividend ETF That Belongs in Almost Every Long-Term Portfolio
Key Points
The Schwab U.S. Dividend Equity ETF holds 100 top-quality dividend stocks.
Its holdings have above-average yields and strong five-year dividend growth rates.
The ETF should provide investors with a growing income stream and robust total return potential.
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Dividend stocks make ideal long-term investments. Ned Davis Research and Hartford Funds have found that since 1973, dividend stocks in the S&P 500 have delivered an average annual return of 9.2%, more than double the return of non-dividend-paying stocks (4.2%).
One of the easiest ways to invest in dividend stocks is through an exchange-traded fund (ETF). Here's why the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) belongs in almost any investor's long-term portfolio.
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Focused on the top dividend stocks
The Schwab U.S. Dividend Equity ETF's goal is to track the Dow Jones U.S. Dividend 100 Index. That index measures the performance of about 100 high-yielding U.S. stocks with a consistent dividend record. It selects them based on several quality characteristics, including dividend yield, five-year dividend growth rate, and strong financial metrics.
The index reconstitutes its holdings once a year to emphasize higher quality holdings. It will add companies that stand out in its screening process while deleting those that have cut their payouts or have lower dividend qualities. That helps ensure it focuses on holding the highest-quality dividend stocks.
As a result, the fund holds companies that pay higher-yielding dividends that steadily grow. For example, at the index's last annual reconstitution, its holdings had an average dividend yield of 3.4% (about three times the S&P 500's current 1.1% yield) while delivering an average annual dividend growth rate of 9.4%.
Why dividend growth matters
The Schwab U.S. Dividend Equity ETF's dual focus on yield and growth is noteworthy. While data from Ned Davis Research and Hartford Funds show that dividend stocks generally outperform non-payers, dividend growers delivered much higher returns (10.2%) than companies with no change in their policy (6.9%) and dividend cutters and eliminators (-1%).
By screening for stocks with high dividend yields and strong growth, the Schwab U.S. Dividend Equity ETF has historically provided investors with a growing stream of dividend income and strong total returns.
Here's a look at the fund's quarterly dividend payment throughout its history:
SCHD Dividend data by YCharts
The ETF should continue to provide investors with an above-average, steadily growing income stream.
The main driver of long-term dividend growth is earnings growth. That also supports long-term stock price appreciation. As a result, the fund's holdings tend to appreciate, boosting its total return. Here's a look at its annualized return performance over the years:
|
Fund |
1-Year |
3-Year |
5-Year |
10-Year |
Since inception (10/20/2011) |
|---|---|---|---|---|---|
|
SCHD |
29% |
16.2% |
8.7% |
12.9% |
13.3% |
Data source: Schwab Asset Management.
A no-brainer dividend ETF to hold for the long haul
The Schwab U.S. Dividend Equity ETF focuses on high-yielding dividend-growth stocks. As a result, it provides investors with an above-average income stream and strong total return potential. That combination should earn it a place in almost any investor's portfolio.
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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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