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If you can find stocks that consistently raise their dividends, typically offsetting the impact of inflation and then some, you could find yourself in the enviable position where you can leave your principal investment untouched. Instead, you get to live off your dividends and pass along your stocks to your heirs or donate them to charity.
But building a portfolio of
high-quality dividend stocks
isn't easy. Fortunately, there's one exchange-traded fund (ETF) that can take care of it for you. And if you invest early and consistently until retirement, you could end up with a portfolio worth over $850,000 that pays out around $30,000 in annual dividends.
The best dividend ETF on the market
Two simple factors that can help investors find companies that are likely to raise their dividends in the future are management's history of dividend increases and the company's financial health. If management has consistently increased the dividend and has the financial ability to keep doing so, it's very likely to continue the streak. That's why the
Schwab U.S. Dividend Equity ETF
(NYSEMKT: SCHD)
is an effective way to invest in high-yield dividend growth stocks.
The
index fund
follows the
Dow Jones U.S. Dividend 100 Index
, which selects 100 stocks that have each increased their dividend annually for at least 10 consecutive years. It ranks each eligible company by several criteria: the ratio of free cash flow to debt, return on equity, dividend yield, and dividend growth rate. The top 100 companies (based on a composite ranking of all four criteria) are included in the index and weighted by market cap.
As of this writing, the 10 largest companies (and their dividend yields) in the index are as follows:
Coca-Cola
(2.8%)
Verizon Communications
(6.2%)
Altria
(6.8%)
Cisco Systems
(2.6%)
Lockheed Martin
(2.8%)
ConocoPhillips
(3.7%)
Home Depot
(2.5%)
Chevron
(5.1%)
Texas Instruments
(3%)
Abbvie
(3.6%)
As you can see, you get a mix of high-yield dividend stocks along with stocks that have strong growth supporting future payout increases. The result is a combined yield of about 4% based on trailing-12-month distributions from the ETF. But the forward yield should be even higher considering most constituents will pay out more over the next year than the previous year.
With an expense ratio of just 0.06%, the cost of investing in this ETF is low and in line with some of the most popular index funds on the market. The Dow Jones dividend index's decision to weight constituents by market cap (with a 4% weight limit) makes it a very efficient index to track, and it lowers the risk tied to any high-yield stocks that aren't as fundamentally sound as the screener suggests. If the market bids down the value of those stocks, they will comprise a lower percentage of the index over time, while the high-quality businesses rise to the top.
How $500 per month can turn into $30,000 in annual dividends
Consistently investing $500 per month into the Schwab U.S. Dividend Equity ETF will eventually produce a sizable portfolio. Automatically reinvesting the quarterly distribution from the ETF will ensure a good total return on your investments as you accumulate shares over time.
Since its inception in 2011, the fund has produced an annualized total return of 12.2%. That's an exceptional performance, but it's also worth pointing out the
S&P 500
index has beaten the ETF with an annualized total return of 14.5%. The gap between the two has widened recently due to the outperformance of growth stocks since 2023. Historically, the S&P 500 averages returns around 10% per year, and 9% is more appropriate as a conservative estimate of the ETF's annual total return.
The ETF's 4% distribution yield is also relatively high, but it may come down over time as the Federal Reserve lowers interest rates. That said, there's no telling what prevailing interest rates will be well into the future. A 3.5% yield is a reasonable estimate for the ETF's future yield.
With those assumptions in mind, here's how a $500 monthly investment in the Schwab U.S. Dividend Equity ETF could grow over time if you automatically reinvest dividends.
Years Investing
Portfolio Value
Forward Dividend Payment
1
$6,245
$219
5
$37,368
$1,308
10
$94,862
$3,320
15
$183,323
$6,416
20
$319,431
$11,180
25
$528,851
$18,510
30
$851,070
$29,787
Calculations by author.
There are a few important caveats to the above scenario. First of all, it's based on forecasts for expected returns and dividend yields that could be well off the mark.
More importantly, those returns won't be linear over time. The market is full of ups and downs. The sequence and size of those ups and downs could have a tremendous impact on the final result of your investments. That said, the longer your holding period, the more likely your results will look like the table above.
Another important consideration is the impact of inflation: $30,000 won't have the same buying power in 30 years as it has today. That means investors will have to adjust their expectations or strategy if they want future purchasing power equivalent to $30,000 today. That could mean consistently increasing the monthly contribution, for example.
While your actual results may vary from the above table, the key takeaway for most investors is to get started and remain consistent. The Schwab U.S. Dividend Equity ETF is a great option if you seek dividend growth and income in retirement.
Should you invest $1,000 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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Adam Levy
has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbbVie, Chevron, Cisco Systems, Home Depot, and Texas Instruments. The Motley Fool recommends Lockheed Martin and Verizon Communications. The Motley Fool has a
disclosure policy
.
