The stock market has slumped this year. The S&P 500 is down about 10% from the beginning of the year over concerns that tariffs could cause a recession. If that ends up being the case, the market could continue sinking.
One positive from this year's market downdraft is that it's creating some attractive investment opportunities. One that income investors shouldn't pass up is buying the Schwab U.S. Dividend Equity ETF (SCHD +0.78%). Here's why investors should buy this dividend ETF without hesitation, even if the market continues its slide.
High-quality dividend stocks
The Schwab U.S. Dividend Equity ETF has a straightforward strategy. The exchange-traded fund (ETF) aims to track the Dow Jones U.S. Dividend 100 Index. The managers of that index designed it to track the performance of 100 top dividend stocks. They screen companies based on several characteristics, including the strength of their financial profiles relative to their peers, their dividend yields, and their dividend growth rates over the past five years.
The fund's emphasis on dividend growth is a crucial characteristic. Historically, companies that steadily grow their dividends have delivered the highest total returns. According to data from Ned Davis Research and Hartford Funds, dividend growers and initiators have delivered a 10.2% average annual total return over the past 50 years. That has outperformed the returns of companies that don't increase their dividends (6.8%), non-dividend-payers (4.3%), and dividend cutters and eliminators (-0.9%).
The Schwab U.S. Dividend Equity ETF doesn't just focus on any dividend growth stocks. As noted, the index it tracks screens companies based on their dividend growth rates over the past five years, which has averaged 8.4% for its current holdings. Furthermore, by also screening for financially strong companies, its holdings are in excellent positions to continue increasing their dividends in the future. Because of that, the fund should be able to continue distributing more income to investors as the years go by:
SCHD Dividend data by YCharts
That steady dividend growth has contributed to the ETF's strong returns over the years. It has delivered an 11.4% annualized total return over the past decade and 12.9% since its inception in 2011.
Why now's a great time to buy
Like the broader market, the Schwab U.S. Dividend Equity ETF has slumped this year. The ETF's price is down about 10% from its peak earlier this year.
However, one of the positives of the stock market sell-off is that dividend yields move in the opposite direction as stock prices. As such, the yield on the Schwab U.S. Dividend Equity ETF has risen to around 4%. Considering the S&P 500's dividend yield is currently below 1.5%, the ETF will provide investors with more dividend income, which gives them a higher base return. They can use that income to purchase more shares of the ETF to help compound their returns over the long term.
Given this dynamic where the dividend yield rises as the ETF's value falls, it's a great fund to buy if the market keeps sinking. An investor would be able to lock in an even higher income yield on those future purchases. It would also put them in an even better position to earn strong total returns in the future as the ETF's value recovers as the underlying companies grow their dividend payments.
A high-quality investment opportunity
The Schwab U.S. Dividend Equity ETF is a great fund to buy in the current market environment. A sinking stock market has driven up the fund's dividend yield, enabling investors to lock in a lucrative income stream. The income from this fund should continue rising in the future as its holdings increase their dividend payments. This growth in dividends should contribute to strong total returns for fund investors. The potential for significant future returns is why investors should consider buying this ETF, even if the market continues to decline.
