This high-quality ETF can be a reliable source of income for investors.
I never shy away from a chance to tell someone how lucrative dividend stocks can be. Reliable distributions may not be as fun to brag about as share price appreciation, but they can quietly help you build wealth, particularly if you reinvest them to benefit from compound growth. And succeeding with an income investment strategy doesn’t require the acumen of a Wall Street veteran, either. It can be as simple as investing in a dividend-focused exchange-traded fund (ETF).
There are numerous worthwhile dividend ETFs on the market, but if you’re looking for one to invest $1,000 in now, I say look no further than the Schwab U.S. Dividend Equity ETF (SCHD -1.67%). It checks off many of the boxes that dividend investors should have on their lists.
Image source: Getty Images.
A good vetting process
One of the boxes the Schwab U.S. Dividend Equity ETF checks off (and arguably the most important one) is that it contains only high-quality companies. It tracks the Dow Jones U.S. Dividend 100, and entry into that index requires that companies have consistent cash flow, a strong balance sheet, a track record of at least 10 years of dividend payouts, and strong profitability.
These criteria mean that its components aren’t picked solely based on their dividends, and that they’re unlikely to be yield traps — stocks where the yields are high (and thus, attractive on the surface) because their share price has declined meaningfully due to poor business performance.
This doesn’t mean companies in this ETF won’t ever face challenges, but they have businesses built to withstand them. Below are the fund’s top 10 holdings:
| Company | Weight in the ETF’s Portfolio |
|---|---|
| AbbVie | 4.35% |
| Lockheed Martin | 4.25% |
| Merck | 4.22% |
| Amgen | 4.14% |
| Cisco Systems | 4.07% |
| ConocoPhillips | 4.01% |
| Altria Group | 3.92% |
| Chevron | 3.90% |
| Coca-Cola | 3.83% |
| Home Depot | 3.82% |
Source: Charles Schwab. Percentages as of Oct. 7.
These companies aren’t the high-flying tech stocks that get a lot of attention in the media and on Wall Street, but they’re reliable, generate consistent cash flows, and have proven that their businesses can hold up during tough economic times. That’s always important, but it’s especially so with dividend stocks, which provide much of their long-term value to shareholders by steadily distributing profits.
A dividend that will grow over time
Not only do the Schwab U.S. Dividend Equity ETF’s criteria rule out companies with shaky or unstable dividends, they also favor companies that prioritize regularly increasing their payouts. Over the past decade, the ETF’s dividend per share has increased by 187% to $0.26 per quarter.
At the ETF’s price at the time of this writing, that works out to around a 3.8% yield, meaningfully above its average over the past decade.
SCHD Dividend Yield data by YCharts.
Although the Schwab U.S. Dividend Equity ETF’s dividend yield will inevitably fluctuate as the prices of the stocks in its portfolio do, if we assume it remains around 3.8%, that would pay out around $38 annually per $1,000 invested. That’s not life-changing money. However, it can add up over time, especially if you reinvest your dividends and focus on acquiring more shares.
How much could a $1,000 become worth?
There’s no way to predict how a stock or ETF will perform, but for the sake of illustration, let’s assume the Schwab U.S. Dividend Equity ETF continues to deliver at the same pace it has averaged over the past decade: an average annualized total return of 11.7%. At that rate, here is roughly how much a $1,000 investment would be worth after various periods (accounting for SCHD’s 0.06% expense ratio):
- 10 years: $3,007.
- 15 years: $5,215.
- 20 years: $9,044.
- 25 years: $15,685.
Those are impressive gains, but your results would be even better if you steadily invested more money in it over time. Adding $100 a month would give you a holding worth around $23,700 in 10 years, $48,670 in 15 years, $91,980 in 20 years, and $167,080 in 25 years. Those are huge differences from just the one-time $1,000 investment.
Nothing is guaranteed in the stock market, but the Schwab U.S. Dividend Equity ETF has a track record of being a great choice for investors seeking reliable and consistent income.
Stefon Walters has positions in Coca-Cola. The Motley Fool has positions in and recommends AbbVie, Amgen, Chevron, Cisco Systems, Home Depot, and Merck. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.