Pursue Enduring Passive Income? Invest in This Index Fund and Maintain Ownership Indefinitely.
Many investors overlook the significance of dividends, especially when it comes to retirees who are already acquainted with dividend stocks and their high yields. However, dividend investing is not exclusive to elderly individuals.
Fluctuating stock prices can be common, but dividends consistently accumulate. Dividends represent actual money in your possession and do not diminish following payment. Since 1940, dividends have accounted for approximately 34% of the S&P 500's overall returns. However, re-investing these dividends unlocks an additional level of compounding, which can lead to substantial wealth accumulation. Dividends that have been re-invested have contributed about 85% of the S&P 500's total returns since 1960.
To reap decades of passive income that could potentially snowball into multigenerational wealth, you should seriously consider this. The following exchange-traded fund (ETF) is widely regarded as the most effective foundation for this endeavor. Consider purchasing shares right now and holding onto them indefinitely.
Dividend diversification through the Schwab U.S. Dividend Equity ETF
The Schwab U.S. Dividend Equity ETF (symbol: SCHD; current yield: -0.58%) is arguably the top dividend ETF available. The primary advantage of ETFs is their capacity for automatic diversification, a fact that ETFs, as collections of stocks, trade on equity exchanges under a single ticker symbol, demonstrate.
In this situation, the Schwab U.S. Dividend Equity ETF (SCHD) holds 103 individual stocks. The fund mirrors and adheres to the Dow Jones U.S. Dividend 100 index. In essence, a SCHD share represents a minuscule ownership percentage of these 103 individual firms.
To delve further, the SCHD encompasses companies spanning various industries, with financials, healthcare, consumer staples, and industrials occupying the largest shares (at 18.2%, 15.8%, 14%, and 13.4%, respectively). Energy accounts for 11.9%, while under 10% of the fund comprises other industries, including technology at only 8.8%. The fund's top 10 individual holdings include Bristol-Myers Squibb, BlackRock, Cisco Systems, Home Depot, Chevron, Texas Instruments, Lockheed Martin, Verizon, Amgen, and United Parcel Service (UPS).
No stock dominates the fund, with no single stock exceeding 4.55%. In contrast, the S&P 500 attributes over 7% of its weight to Nvidia, despite being composed of 500 companies. A compelling argument could be made that the SCHD is more diversified than the S&P 500 currently.
The ideal choice for reinvesting dividends
Reinvesting dividends can grow your passive income over time, much like a snowball that expands as it rolls downhill. The mathematical process behind this snowball involves a stock's initial dividend yield and the speed at which the dividend increases. Frequently, a higher initial dividend yield results in less growth.
Retirees often choose high yields due to their reluctance to wait for dividend increases to accumulate. Conversely, those with ample time may seek out dividends with faster growth rates, even if the yields are low. If companies can maintain a sufficient growth rate, these dividends may eventually surpass today's high yielders. Adjust the balance between yield and growth to your preferences.
What sets SCHD apart is its excellent blending of the two. Currently, the fund yields slightly over 3.5%, which is relatively high when compared to most market stocks. For perspective, the S&P 500 yields a mere 1.3%.
Additionally, the dividend is growing. The fund's dividend increased by 174% during the past decade.
The Dow Jones U.S. Dividend 100 index, the index SCHD follows, employs a stringent scoring system to pick the stocks for the index based on multiple financial metrics. The index prioritizes financially stable companies with high return on equity that are raising their dividends, then selects the highest-yielding stocks from this pool. Unfortunately, the fund's low exposure to technology has resulted in it lagging behind the S&P 500 since last year. However, overall, it has proven to be a terrific fund for individuals looking to increase their passive income through dividends over time. There seems to be no compelling reason for this to change any time soon.
Investing in the Schwab U.S. Dividend Equity ETF (SCHD) allows for automatic diversification, as it holds 103 individual stocks that span various industries. This diversification can potentially make the SCHD more diversified than the S&P 500.
The SCHD's dividends have shown significant growth over time, with a 174% increase in dividends during the past decade. This growth, combined with the fund's relatively high yield of over 3.5%, makes it an appealing option for individuals looking to boost their passive income through dividend investing.
