Many investors think that dividend stocks are boring investments. While they might not deliver the thrills of some growth stocks, their returns are anything but boring. Over the last 50 years, dividend stocks have outperformed non-dividend payers by more than two-to-one.
The Schwab U.S. Dividend Equity ETF (SCHD 0.24%) has experienced the power of dividend investing firsthand. The exchange-traded fund has delivered a 12.9% annualized return since its formation in October 2011. Here's a look at why its dividend investment strategy has been so successful.
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Focused on the best dividend stocks
The Schwab U.S. Dividend Equity ETF has a very simple strategy. It tracks the Dow Jones U.S. Dividend 100 Index, which measures the performance of 100 top high-yield dividend stocks. The index screens companies based on four dividend quality characteristics, including dividend yield and five-year dividend growth rate. That focus on dividend growth is worth noting.
The data on dividend stocks shows a clear trend. Companies that steadily grow their dividends deliver the best returns over the long term:
|
Dividend policy |
Average annual total returns |
|---|---|
|
Dividend growers & initiators |
10.2% |
|
Dividend payers |
9.2% |
|
No change in dividend policy |
6.8% |
|
Dividend cutters & eliminators |
-0.9% |
|
Dividend non-payers |
4.3% |
|
Equal-weighted S&P 500 index |
7.7% |
Data source: Ned Davis Research and Hartford Funds. (Note: Data for S&P 500 companies from 1973 to 2024).
A big factor driving the higher returns of dividend growers is their combination of income and earnings growth. The increasing dividend income provides investors with a steadily rising base return while their growing earnings drive share price appreciation.
The Schwab U.S. Dividend Equity ETF holds 100 companies that have higher dividend yields and are growing their payouts at above-average rates. For example, in March, when the fund completed its last annual reconstitution, its 100 holdings had an average dividend yield of 3.8% and had been growing their dividends at an 8.4% annualized rate. For comparison, the S&P 500 currently yields 1.2% while delivering 5% compound annual dividend growth over the last five years. SCHD's higher yield and dividend growth rate should drive higher total returns over the long term.
NYSEMKT: SCHD
Key Data Points
Providing plenty of pop for dividend investors
Two of the funds' top 10 holdings are beverage giants Coca-Cola (KO +0.59%) and PepsiCo (PEP 0.21%). It has a 4% allocation to both companies, which are elite dividend growth stocks. Coca-Cola currently offers a 2.6% dividend yield, while PepsiCo's payout is 3.4%.
Coca-Cola recently increased its dividend by 4%, extending its growth streak to 64 consecutive years. That kept Coca-Cola in the elite group of Dividend Kings, companies with 50 or more years of consecutive annual dividend increases. The company has paid out over $100 billion in dividends since 2010. Meanwhile, PepsiCo also recently increased its dividend by 4%, extending its streak to 54 consecutive years. The beverage and snacking giant has grown its payout at a 7% compound annual rate since 2010.
NYSE: KO
Key Data Points
That steady growth has paid big dividends for shareholders over the years. Since 1990, an investment in Coca-Cola has delivered a 10.6% annualized total return, while an investment in PepsiCo has delivered a 10.4% annualized total return.
Both beverage giants are in strong positions to continue increasing their high-yielding dividends. Coca-Cola's long-term target is to deliver 4% to 6% annual organic revenue growth and 7%-9% earnings-per-share growth. Meanwhile, PepsiCo has similar long-term targets of mid-single-digit organic revenue growth and high-single-digit earnings-per-share growth. Their growing earnings should enable these iconic beverage companies to increase their dividends while also delivering solid price appreciation, helping them continue to deliver meaningful total returns.
Capitalizing on the power of dividend growers
The Schwab U.S. Dividend Equity ETF's strategy of investing in high-yielding dividend growth stocks has paid off over the years. As companies like Coca-Cola and PepsiCo have increased their dividends, the ETF has received a rising stream of dividend income to distribute to investors, while also benefiting from the growing value of its stock holdings. This winning strategy should continue to pay dividends for investors, making the Schwab U.S. Dividend Equity ETF an ideal long-term holding.
