Many investors love dividends for their reliable passive income, especially retirees. If you’re retired, or heading there soon, and you’re looking for a no-hassle solution for dividend stocks, an exchange-traded fund (ETF) focused on dividends might be your best bet.
But it’s not just for people heading into retirement. You just need to take a look at how the market’s been doing over the past three months to understand why dividend stocks are crucial to a safe and growing portfolio. They provide the stability and security to your investments, even if you’re a growth investor.
The Schwab U.S. Dividend Equity ETF (SCHD -0.57%) is a dividend ETF that has a high yield and has also grown over time, making it an attractive option. Let’s dig in further and see why $500 invested in it today could add value to your portfolio.
Passive dividend investing
The equity fund is a passively managed ETF, which means that instead of hiring a fund manager to hand-pick the stocks in the fund, it simply tracks an index. The index it follows is the Dow Jones U.S. Dividend 100 index, a group of 100 top dividend stocks.
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The ETF has 103 stocks at the moment, with about 20% in energy, 20% in consumer staples, 15% in healthcare, and the rest in several other categories, making it well diversified according to category. Its top stocks are Verizon Communications, Coca-Cola, Altria Group, and ConocoPhillips, but no stock accounts for more than 4.4% of the total, and it’s pretty evenly distributed among its components.
One hundred stocks is not a lot for an index ETF, and most index funds have several hundred, or even several thousand, components. But this equity ETF’s stocks are generally lower-risk stocks with leading, established brands, and 100 stocks is still more than many individual stock portfolios, making it a low-risk option.
The fund aims to invest in U.S. stocks that have increased their dividends for at least 10 years, and it excludes real estate investment trusts (REITs) to keep it diversified by category. It’s focused on the quality and sustainability of the stocks’ dividends, and it uses financial ratios to select stocks that demonstrate strength relative to their peers. The resulting 100 have passed a rigorous test and are curated to deliver results.
Growing and high-yielding
The equity fund has a high yield that should keep passive investors satisfied at above 4% today. That’s more than three times what the S&P 500 average offers. It’s also growing, as per the fund’s goals, which means these are stocks that are committed to their dividends. Even though many dividend investors are interested in a high yield, that’s not the only test of dividend strength.
SCHD Dividend Yield data by YCharts
Over time, this fund has high annualized total returns on par with or outperforming the broader market. Over 10 years, it has reported annualized gains of 10.5%, as compared with industry averages of about 8.5%, and since inception in 2011, it has had an annualized return of 12.2%. That gives investors strong returns along with safety and passive income, a powerful combination.
Why you’ll love it
It’s easy to invest in an ETF. It’s actually as easy to invest in one as it is to invest in a stock, since they’re sold on an open market. And because it’s a passive investing instrument, this ETF comes with a low expense ratio of 0.06%. That means you keep more of the gains. Each share costs only about $25, so $500 gets you a nice amount of shares that can grow over time.
The Schwab U.S. Dividend Equity ETF can serve as a central component of a dividend-focused portfolio or as an addition to any portfolio to add safety and passive income.