I love to collect passive income. I don't have to work for it, and it provides me with additional money to invest. Eventually, this strategy will allow me to retire and live off my passive income.
I invest in a variety of income-generating investments. One that I can't stop buying these days is the Schwab U.S. Dividend Equity ETF (SCHD). This exchange-traded fund (ETF) currently has a 4% dividend yield, which is about triple the S&P 500's dividend yield of around 1.3%. That enables me to generate more passive income from every dollar I invest. The fund also has an excellent record of increasing its payments. Because of that, it should provide me with lots of passive income in the future, which is why I just can't stop adding to my position.
Image source: Getty Images.
Holding top-quality dividend stocks
The Schwab U.S. Dividend Equity ETF has a very simple strategy. The ETF aims to track the total return of the Dow Jones U.S. Dividend 100 Index. That underlying index screens stocks based on four dividend quality attributes:
- Cash flow to total debt
- Return on equity (ROE)
- Dividend yield
- Five-year dividend growth rate
The index uses these metrics to select the 100 best stocks based on their ability to pay sustainable, high-yielding dividends that should grow at above-average rates. It runs this screen once a year to reconstitute its holdings. It will remove lower-quality dividend stocks and replace them with companies offering higher-quality payouts.
At its last annual refresh in March, the 100 holdings had an average dividend yield of 3.8% and had grown their payouts at an average annual rate of 8.4% over the past five years. That provides investors with a nice blend of current income and growth potential.
Among the notable additions was oil giant ConocoPhillips (COP -0.49%). It currently ranks as the sixth-largest holding of the Schwab U.S. Dividend Equity ETF. The oil company has a 3.7% dividend yield. It has been growing its payout at a robust rate in recent years (34% in 2024, 14% in 2023, and 11% in 2022). ConocoPhillips aims to deliver dividend growth within the top 25% of companies in the S&P 500 in the future. It should have plenty of fuel to achieve that above-average growth rate. The oil company expects its investments in LNG and Alaska to drive $6 billion in incremental free cash flow over the next few years, putting it on track to deliver sector-leading growth through 2029.
An enriching strategy
The Schwab U.S. Dividend Equity ETF's focus on dividend growth has paid off for its investors. While dividend payments fluctuate from quarter to quarter, they've steadily risen over the years:
SCHD Dividend data by YCharts
As a result, fund investors collect a lucrative and steadily rising income stream. That has helped contribute to its strong total returns (dividend income plus stock price appreciation) over the longer term:
|
Fund |
1-Year Return |
3-Year Return |
5-Year Return |
10-Year Return |
Since Inception (10/20/2011) |
|---|---|---|---|---|---|
|
Schwab U.S. Dividend Equity ETF |
6.75% |
4.91% |
16.29% |
10.55% |
12.10% |
Data source: Schwab.
The fund's long-term performance aligns with the historical returns of dividend growth stocks. Over the last 50 years, dividend growers have delivered an average annual return of 10.2%, according to data from Ned Davis Research and Hartford Funds. They have significantly outperformed companies with no change in their dividend policy (6.8%), non-payers (4.3%), and cutters and eliminators (-0.9%).
While that past performance doesn't guarantee the future of dividend stocks or that the fund will produce strong returns in the future, it does bode well for investors.
Income and upside potential
I'm working hard to grow my passive income and net worth to have a comfortable retirement. The Schwab U.S. Dividend Equity ETF aligns perfectly with those goals. It will provide me with an attractive and rising passive income stream and healthy price appreciation potential. That's why I just can't stop buying this top-notch dividend ETF. I'll likely continue adding to my position each month as I march toward my passive income target.
