I recently bought even more shares of the Schwab U.S. Dividend Equity ETF (SCHD +0.26%). That was the latest in a string of buys as I build my position in this top dividend ETF.
Here are two reasons why I can't stop investing in the Schwab U.S. Dividend Equity ETF.
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A steadily rising stream of dividend income
I love to collect dividend income. That recurring cash flow gives me more money to invest while also putting me on the path to financial freedom.
The Schwab U.S. Dividend Equity ETF aligns with my strategy of generating more dividend income. The fund tracks an index (Dow Jones U.S. Dividend 100 Index) that measures the performance of 100 high-yielding dividend stocks selected based on several dividend quality characteristics, including dividend yield and five-year dividend growth rates.
NYSEMKT: SCHD
Key Data Points
The ETF currently offers a 3.5% dividend yield based on its payments over the last 12 months. That's three times higher than the S&P 500's dividend yield (around 1.1%). As a result, the fund enables me to generate more passive income per dollar invested compared to lower-yielding alternatives.
Meanwhile, the fund's holdings steadily increased their dividends. Over the last five years, its current holdings have hiked their payouts by more than 8% annually. As a result, the Schwab U.S. Dividend Equity ETF has steadily distributed more income to investors:
SCHD Dividend data by YCharts
The fund's high current yield and steadily rising income distributions will enable me to collect more passive dividend income in the future.
Strong total returns
Dividend income is only part of the draw. The Schwab U.S. Dividend Equity ETF also has a strong track record of delivering attractive total returns (dividend income plus price appreciation). Since its formation in October 2011, the fund has delivered an average annual return of 12.9%. It has also delivered an annualized return of more than 10% over the past five- and 10-year periods. Meanwhile, it's off to a strong start this year.
A major driver of those strong returns is the fund's strategy of investing in companies that grow their dividends. Over the last 50 years, the average dividend grower in the S&P 500 has delivered a 10.2% average annual return, according to data from Ned Davis Research and Hartford Funds. That has outperformed companies with no change in their dividend policies (6.8% return), dividend cutters and eliminators (-0.9% return), and companies that don't pay dividends (4.3%).
Sustainable earnings growth is the primary factor enabling companies to steadily increase their dividends. Earnings growth tends to drive stock price appreciation over the long term. As a result, by tracking an index that screens companies for dividend growth, the fund's value should continue to rise as the underlying holdings grow their earnings, dividends, and stock prices.
A wealth-compounding machine
The Schwab U.S. Dividend Equity ETF's simple strategy of investing in 100 of the top high-yielding dividend growth stocks perfectly aligns with my needs. It provides me with an above-average, steadily rising stream of dividend income. On top of that, the fund has a strong record of delivering double-digit total returns. These dual value drivers should enable me to reach financial freedom faster, which is why I continue loading up on this top ETF.
