Deciding how to invest your hard-earned money can feel like being a kid at a candy store. There are many choices, and you want nothing more than to make the perfect decision.
Having $1,000 to invest means you can afford at least one share of most stocks. But the best decision might not be any individual company. Instead, consider buying shares of the Schwab U.S. Dividend Equity ETF (SCHD -0.10%).
Is the fund right for you? It could be if you want to earn passive income through dividends and still sleep well at night. Here are three reasons to buy and hold this tremendous index fund.
1. It's an easy way to diversify your portfolio
You've probably heard the expression "Don't put all your eggs in one basket." It rings true in investing. A diversified portfolio can still generate great investment returns, but limits the downside by spreading your risk. If you hold just a handful of stocks and something unpredictable happens to one, you could be in trouble. But if you're spread across many stocks, even a catastrophe for one might only mean a slight bump in your overall portfolio.
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Index funds are a great way to diversify your investments without putting in the time to study and select several individual companies. The Schwab U.S. Dividend Equity ETF is made up of 104 stocks, so one ticker symbol gives you the diversification of many stocks.
Using an index fund like this one means you can take the thinking out of investing. Professionals manage the fund according to the index it tracks, which, for the Schwab U.S. Dividend Equity ETF, is the Dow Jones U.S. Dividend 100 Index. You can sleep well at night because you know one bad stock won't sink your portfolio.
2. The fund invests in dominant, durable businesses
Companies don't pay dividends out of thin air. A dividend is a cash expense for a business. The only way it can continually raise its dividends and pay more money to investors is by growing its profits over time. When you think about it that way, a long record of dividend growth is a testament to a company's durability and robust business model. In other words, you want to buy and hold such stocks for a long time.
When you look at the Schwab U.S. Dividend Equity ETF (or any other fund), you want to know precisely what your investment gets you. This fund's top holdings tell you a lot about the right mix of industries, growth, and risk for your portfolio:
| Company | Weighting in Fund (%) | Consecutive Dividend Increases |
|---|---|---|
| Broadcom | 5.03 | 14 |
| AbbVie | 4.72 | 12 |
| Merck & Co. | 4.67 | 14 |
| Home Depot | 4.32 | 14 |
| Amgen | 4.08 | 13 |
| Verizon Communications | 3.99 | 20 |
| Chevron | 3.93 | 36 |
| Cisco Systems | 3.92 | 13 |
| Texas Instruments | 3.86 | 21 |
| Coca-Cola | 3.82 | 61 |
Data source: Schwab U.S. Dividend Equity ETF prospectus.
The Schwab U.S. Dividend Equity ETF's most significant holdings are proven blue chip industry leaders in technology, pharmaceuticals, energy, retail, and telecommunications. The fund's top ten positions account for 42% of its total holdings.
3. Dividends give you flexibility
Today, the Schwab U.S. Dividend Equity ETF offers a solid 3.9% dividend yield. The great thing about dividends is that they are tangible cash in your pocket; they don't require you to sell your investment to realize returns. You can do whatever you want with them, but if you're a long-term investor, you should consider reinvesting them to buy more shares.
Reinvesting the dividends to buy more shares means more dividends from those new shares. It's an additional compounding process that you might overlook when considering a dividend-focused investment strategy.
Compounding is like a snowball rolling down a hill. It grows larger faster the longer it goes. And that makes the Schwab U.S. Dividend Equity ETF one of my favorite investments to start a dividend snowball with today.
