I primarily invest in individual stocks. I own over 100 companies, giving me a very diversified portfolio. However, I still sprinkle in a few exchange-traded funds (ETFs).
One ETF that I've been loading up on is the Schwab U.S. Dividend Equity ETF (SCHD 0.16%). Here's why I won't stop buying this top ETF.
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Loaded with top-notch dividend stocks
While I have a diversified portfolio, I prioritize investing in dividend stocks. A major reason is that I love generating passive income. My top financial goal is to achieve financial freedom through passive income by eventually generating enough income to cover my basic living expenses. Other reasons I prefer to invest in dividend stocks are that they're less volatile and have historically delivered significantly higher total returns than non-dividend payers (9.2% average annual returns over the last 50 years compared to 4.2% for non-payers).
I already own many high-quality dividend stocks. However, investing in the Schwab U.S. Dividend Equity ETF enables me to further enhance and diversify that portfolio.
NYSEMKT: SCHD
Key Data Points
The fund tracks the Dow Jones U.S. Dividend 100 Index. That index screens companies based on several dividend quality characteristics, including yield, five-year dividend growth rate, and financial strength. It holds around 100 high-quality, higher-yielding dividend stocks. The index reconstitutes its holdings once a year, rotating out lower-quality holdings and adding those with the best dividend characteristics. At its last annual reconstitution, the fund added 25 new stocks. The fund's more than 100 holdings had yields of 3.4% on average (more than three times the S&P 500's level) and had grown their payouts by an average annual rate of 9.4% over the past five years.
While I already hold many of the same companies, I don't own all of them, including half of the 10 largest holdings. That includes the fund's top holding, Texas Instruments (TXN 1.73%), which has a 6.1% allocation. The semiconductor company has a lower dividend yield (currently 1.9%). However, it has a strong record of increasing its dividend (22 consecutive years, including a 4% raise late last year). It's also growing rapidly (31% earnings-per-share growth in the first quarter and a 154% surge in free cash flow over the last 12 months). That supports its growing dividend, continued share repurchases, and rising stock price (it has nearly doubled over the last six months).
Exceptional returns for a low cost
Dividend stocks have historically performed very well. The best returns have come from companies like Texas Instruments that steadily increase their dividends. Over the last 50 years, dividend growers in the S&P 500 have delivered an average annualized total return of 10.2%.
Given the historical returns of dividend growth stocks, the Schwab U.S. Dividend Equity ETF has unsurprisingly produced strong returns for its investors:
|
Fund |
1-Year |
3-Year |
5-Year |
10-Year |
Since its inception in 2011 |
|---|---|---|---|---|---|
|
Schwab U.S. Dividend Equity ETF |
29.00% |
14.03% |
9.06% |
12.88% |
13.28% |
Data source: Schwab Asset Management.
The ETF has delivered a robust return over the past year, driven by strong price appreciation in its top holdings, such as Texas Instruments. Meanwhile, it has delivered terrific returns over the longer term, driven by the growth in the dividends and share prices of its holdings.
The fund produces these robust returns for a very low cost. It has an ultra-low expense ratio of 0.06%. That's about $0.60 for every $1,000 invested. That negligible cost for such a high-performing fund makes the ETF an even more no-brainer addition to my portfolio.
Continuing to load up
I've purchased lots of SCHD shares over the past year to build my position. It offers diversified exposure to some of the best dividend stocks, which provide income and generate strong total returns. That's why I won't stop loading up on this terrific ETF.
