Exchange-traded funds (ETFs) can be great tools to help build your wealth over the long term. They make it very simple to put things on autopilot. You can invest some money each month and watch your wealth grow over time.
For example, investing $300 a month into the iShares Core High Dividend ETF (HDV 0.43%) could grow into $1 million in about 33 years, given the fund's historical average annual total return of 10.3% since its inception. Here's a closer look at this simple wealth-building ETF.
A core holding
The iShares Core High Dividend ETF has a very simple strategy. The fund invests in established, high-quality U.S. companies that pay dividends. It's intended to be a core holding for those seeking income.
However, dividend stocks do much more than generate income. They have historically delivered the highest returns. Over the last 50 years, the typical dividend stock in the S&P 500 has produced a 9.2% average annual total return, according to data from Ned Davis Research and Hartford Funds. That has outperformed dividend non-payers by more than 2 to 1 (4.3% average annual return). Meanwhile, the best returns have come from dividend growers and initiators (10.2% average annual total return).
The iShares Core High Dividend ETF focuses on the cream of the dividend crop. It holds shares of 75 high-quality dividend stocks that tend to have a higher dividend yield than average. For example, its dividend yield over the last 12 months has been around 3.4%, which is more than double the S&P 500's dividend yield. According to research by Wellington Management, companies with higher dividend payout ratios (and higher yields) have historically outperformed the S&P 500 more often than their lower-yielding peers, thanks largely to their higher dividends.
Given its focus on dividend quality and higher yields, the ETF has historically produced strong returns, averaging 10.3% since its inception.
Drilling down into some of the ETF's top holdings
The iShares Core High Dividend ETF holds a diverse group of dividend stocks by sector. However, the fund currently has an outsize weighting to energy stocks (over 25% of its holdings). That's because many of the sector's top companies have exceptional records of paying dividends.
For example, the fund's top two holdings are currently energy giants ExxonMobil (XOM 0.15%) and Chevron (CVX 1.16%). The ETF has a 10% weighting to Exxon and a 6.6% allocation to Chevron.
NYSE: XOM
Key Data Points
Exxon is one of the top dividend payers in the world. The oil giant paid an industry-leading $4.3 billion in dividends during the second quarter (the second-highest payment among S&P 500 members). The big oil company currently has a dividend yield of 3.1%. Exxon also has an amazing record of dividend growth. It has increased its dividend for the last 41 straight years, growing the payout at a 5.8% average annual rate. That's a tremendous feat, given all the volatility in the oil sector over the years. Exxon has navigated the sector's volatility by having integrated, low-cost operations (it produces oil and refines it into higher-valued products like gasoline) and a fortress-like financial profile.
Chevron has a similarly strong record of paying dividends. It has increased its payout for 37 straight years. It has grown its dividend faster than the S&P 500 over the past five years and more than double the rate of its nearest peer (Exxon). It most recently increased its payment by 8% and currently has a 4.3% yield. Chevron has delivered that steady dividend growth by following the same blueprint as Exxon: It has an integrated business and a top-tier balance sheet. Those factors put it in a solid position to continue increasing its dividend.
NYSE: CVX
Key Data Points
The ETF holds many other stocks with long histories of paying higher-yielding and growing dividends. Because of that, fund investors should steadily see their wealth grow as these companies increase their earnings and dividend payments.
A steady investment in this simple ETF can yield a high return
The iShares Core High Dividend ETF focuses on high-quality dividend stocks, like ExxonMobil and Chevron. These companies offer high dividend yields and have traditionally increased their payments each year. That combination of income and growth has historically produced strong total returns. Because of that, this ETF could grow a relatively modest monthly investment into $1 million over the next three decades if it maintains its historical rate of return.
