Many investors view dividend stocks as lower-risk, lower-return investments. However, the data says otherwise. Over the last 50 years, S&P 500 dividend payers have outperformed non-payers by more than two-to-one (9.2% annualized total returns compared to 4.2%, according to data from Hartford Funds and Ned Davis Research). The best returns have come from dividend growers (10.2%).
The strong returns of dividend growth stocks support my prediction that the Schwab U.S. Dividend Equity ETF (SCHD +1.49%) can double by 2034, and pay you passive income as you wait. Here's the math and why I think this top ETF can deliver.
Image source: Getty Images.
The math to doubling by 2034
There's a simple formula for calculating how long it will take an investment to double in value, based on its rate of return. The formula, known as the Rule of 72, is straightforward. Divide 72 by the expected rate of return to determine the number of years needed for the investment to double.
To calculate how long it would take the Schwab U.S. Dividend Equity ETF to double in value, we need to estimate the expected average annual total return. I'm going to use 9.75%, which is the fund's average annual share price gain since its inception in 2011. I think it's reasonable to assume the fund can continue to grow the value of its shares at a rate around that annual pace going forward.
NYSEMKT: SCHD
Key Data Points
That's because dividend growth is a core aspect of this fund's investment strategy. It has grown its payout at an 11.2% compound annual rate since 2017, driven by the underlying earnings growth of its holding companies. Its current holdings have increased their dividends at an average annual rate of 9.4% over the last five years.
Using the Rule of 72, it would take the Schwab U.S. Dividend Equity ETF a little less than seven and a half years to double at a 9.75% average annual total return. That puts it on track to double by early 2034.
But wait, there's more!
This calculation only includes share price growth. However, that's just part of the fund's total return. The Schwab U.S. Dividend Equity ETF also pays quarterly distributions to investors. The fund offers a 3.3% income yield based on its current share price and trailing 12-month payments. At that rate, a $10,000 investment would produce $330 in annual passive income, in addition to the growth in SCHD's value.
Investors are free to use this passive income however they wish, including spending it. However, if they reinvest their dividends in SCHD, it would meaningfully boost the total return. The ETF has delivered an average annual total return of 13.3% since its 2011 inception, including reinvested dividends. If it continues to deliver a similar return, an investor who reinvests their dividends would double their money in a little less than five-and-a-half years, or by 2032.
Growing your wealth and your income
The Schwab U.S. Dividend Equity ETF provides the best of both worlds. It offers strong appreciation potential and passive dividend income. I expect it can double an investor's money by 2034 while also providing a lucrative income stream. That dual source of return allows investors to grow their wealth while collecting passive income as they wait.
