Stock price increases often steal the spotlight when it comes to earning money in the stock market, as the process is quite direct: purchase shares at a certain price, sell them at a higher price, and pocket the difference. While this method is simple, dividends can also be a powerful way to generate returns from stocks.
If you invest in reputable stocks or exchange-traded funds (ETFs), dividends provide a reliable stream of income, typically paid out every quarter (or even monthly in some cases). Dividends not only enhance returns when stock prices are rising but also offer some protection during downturns.
For those seeking a dependable dividend ETF to diversify their holdings, the Schwab U.S. Dividend Equity ETF ( SCHD 0.07%) is worth a look. With patience and time, a $1,000 investment could yield significant results.
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SCHD selects companies based on strict quality standards
The phrase "Not all that glitters is gold" rings true for dividend stocks as well. A high dividend yield doesn't automatically make a stock a good investment. Sometimes, a high yield is simply the result of a declining stock price due to poor company performance, creating what's known as a yield trap.
By investing in SCHD, you can avoid much of the risk associated with yield traps, thanks to the fund's rigorous selection process. SCHD follows the Dow Jones U.S. Dividend 100 Index, and companies must meet several requirements to be included:
- Solid financial health
- Reliable cash generation
- A minimum of 10 consecutive years of dividend payments
- Strong profitability indicators (like return on equity)
These requirements help investors filter out lower-quality companies, reducing the need for extensive individual research. Some well-known "dividend kings"—firms with at least 50 years of uninterrupted dividend growth—featured in the ETF include Coca-Cola, Altria, PepsiCo, Target, and Kimberly Clark.
Consistently attractive dividend yield
While it's important not to focus solely on dividend yields—since they can change with stock prices—it's still useful to consider how well a dividend-focused ETF maintains its yield. Currently, SCHD offers a 3.7% yield, which is higher than its 10-year average of 3.1% and roughly triple the yield of the S&P 500 at present.
SCHD Dividend Yield data by YCharts
At this yield, a $1,000 investment would generate about $37 in dividends each year. While this may not be enough for early retirement, it can accumulate into a substantial sum over time—especially if you use a dividend reinvestment plan (DRIP) through your brokerage. With DRIP, your dividends are automatically used to purchase more shares of SCHD, compounding your returns.
Additionally, SCHD has boosted its dividend payouts by more than 160% over the last ten years and is likely to continue increasing them, giving your $1,000 investment even more potential to grow.
Don't count on rapid share price gains
Since its launch in October 2011, SCHD has delivered an average annual total return of 12.4%, which is below the S&P 500's 15% over the same period. Even so, these returns are still impressive and would satisfy many investors.
^SPX data by YCharts
Although past performance doesn't ensure future results, let's suppose SCHD continues to average a 12% annual total return. In that case, a one-time $1,000 investment could grow to more than $9,600 over 20 years. If you contribute an extra $100 each month, your investment could exceed $96,000. Plus, with a low expense ratio of 0.06%, you get to keep more of your earnings.
