Over the last 50 years, the average S&P 500 member has delivered a 7.7% annualized total return. However, returns among S&P 500 members largely fell into two groups. Companies that paid dividends outperformed the average (9.2% average annual return according to data from Ned Davis Research and Hartford Funds), while those that didn't pay dividends underperformed (4.3%). Meanwhile, the best returns came from dividend growers and initiators (10.2%).
Given these returns, if I could buy only one ETF this month, I'd choose the Schwab U.S. Dividend Equity ETF (SCHD 0.21%). It focuses exclusively on investing in high-yielding dividend stocks that grow their payouts.
Image source: Getty Images.
A straightforward strategy
The Schwab U.S. Dividend Equity ETF has a simple strategy. It tracks an index (Dow Jones U.S. Dividend 100 Index) that measures the performance of high-quality, high-yielding dividend stocks. It screens companies based on several dividend quality characteristics, including dividend yield, five-year dividend growth rate, and relative financial strength compared to peers.
NYSEMKT: SCHD
Key Data Points
As a result, the Schwab U.S. Dividend Equity ETF invests in 100 of the top high-yielding dividend stocks. For example, its top holding is currently Lockheed Martin (LMT +0.64%). The defense contractor has a 2.1% dividend yield, nearly double the S&P 500's 1.1% yield. Lockheed Martin has increased its dividend for 23 consecutive years, including by 5% late last year. The company generates significant cash flows, enabling it to invest in research and development and make acquisitions to support its continued growth.
Overall, the fund's 100 holdings currently yield an average of 3.5%. Meanwhile, they've grown their payouts by more than 8% annually over the past five years.
The ETF's strategy continues to pay dividends
The Schwab U.S. Dividend Equity ETF provides investors with an attractive and growing stream of dividend income. The fund's roughly 3.5% yield is nearly three times higher than the S&P 500. Meanwhile, it has steadily distributed more cash to investors as its holdings increase their dividend payments:
SCHD Dividend data by YCharts
Additionally, the value of the fund's holdings steadily appreciates as those companies grow their earnings to support their rising dividends. The Schwab U.S. Dividend Equity ETF's combination of income and value appreciation has enabled it to produce strong annualized returns over the years:
|
Fund |
1-Year |
3-Year |
5-Year |
10-Year |
Since its inception in 2011 |
|---|---|---|---|---|---|
|
Schwab U.S. Dividend Equity ETF |
11.34% |
9.07% |
10.93% |
12.73% |
12.88% |
Data source: Schwab Asset Management.
Given its continued strategy of investing in the top high-yield dividend growth stocks, I expect the ETF to continue delivering strong total returns.
Easy access to the top dividend stocks
The Schwab U.S. Dividend Equity ETF focuses on investing in the best dividend growth stocks. These companies have a long history of delivering above-average returns, which has helped the fund generate strong returns since its inception. This high return potential is why I'd buy the Schwab U.S. Dividend Equity ETF if I could only buy one ETF this March.
