Can the Schwab U.S. Dividend Equity ETF Contribute to Millionaire Status?
Every investor yearns for wealth accumulation, but the path to this coveted destination is multifarious. When it comes to millionaire-making investments, the discussion often revolves around their likelihood of success and the timeframe required.
Commonly, individual stocks serve as the home run investment. However, exchange-traded funds (ETFs) have gained popularity. ETFs, such as the Schwab U.S. Dividend Equity ETF (SCHD), are mainly about the investment strategy as they represent numerous stocks (occasionally hundreds) and trade under one ticker symbol.
The SCHD is a popular choice for dividend stock ETF enthusiasts. Yet, investors debate its growth potential and upside for long-term, wealth-seeking investors. I delve into the ETF's long-term prospects and strategies to optimize its returns.
A Divided Perspective on SCHD
Investing in SCHD grants share ownership in over a hundred companies. This high level of diversification lowers the investment risk from the outset. The ETF tracks the Dow Jones U.S. Dividend 100 index.
At the current share price, the ETF offers investors a 3.3% distribution (dividend) yield, significantly surpassing the S&P 500's 1.3%.
The strategy here is to opt for mature, blue chip companies with a proven record of paying and continually raising dividends. SCHD's top ten holdings are:
- Pfizer: 14 years of consecutive annual dividend increases
- BlackRock: 15 years
- AbbVie: 52 years (includes years from Abbott Labs)
- Cisco Systems: 14 years
- Coca-Cola: 62 years
- Bristol Myers Squibb: 18 years
- Texas Instruments: 21 years
- PepsiCo: 52 years
- Lockheed Martin: 22 years
- Amgen: 13 years
The focus on dividends represents a company's earnings it could have reinvested but instead chose to distribute to shareholders. While these mature companies tend not to lead in market growth, dividends serve as a litmus test for a strong and growing company. In essence, consistent dividend stocks offer a reliable source of income, even if growth may be lacking.
The SCHD has delivered nearly 400% in total returns since late 2011, making it a multibagger. This conservative blue-chip dividend stock strategy can enrich investors with time, by leveraging the power of compounding.
SCHD vs. S&P 500: A Closer Look
Critics often argue that SCHD lags behind the S&P 500. The common suggestion is to invest in an S&P 500 index fund as an alternative.
While the S&P 500 remains an attractive investment, the argument against SCHD may not be as compelling as it appears. If you examine their performance history, you'll find that they were surprisingly close when considering timeframes shorter than the past five years:
Though the S&P 500 has gained some traction due to the "Magnificent Seven" stocks, which collectively account for roughly 33% of its value, this does not imply that the index is as diverse as its name implies. The S&P 500 could potentially face greater volatility in a tech downturn, given its disproportionate weighting in technology stocks, unlike the SCHD, which has a technology exposure of only 8.8%.
In summary, a recency bias and fears of a tech stock market crash should not overshadow the effectiveness of SCHD in generating wealth for long-term investors.
Optimizing SCHD Investments
To fully harness the benefits of SCHD, one must reinvest dividends.
The growth potential of SCHD's constituent companies may not be as rapid as with growth stocks, but reinvesting dividends enables your dividends to purchase additional ETF shares. This further compounding mechanism can significantly boost your investment returns.
As these dividends accumulate, you can either continue reinvesting them, effectively creating a dividend snowball, or choose to retain your dividends as income, making your portfolio potentially self-sustaining.
In truth, achieving millionaire status transcends labeling. It's about securing a lifetime of wealth.
- For investors seeking wealth accumulation, considering exchange-traded funds (ETFs) like the Schwab U.S. Dividend Equity ETF (SCHD) can be beneficial due to their diversification and potential for high dividend yields.
- By opting for mature blue-chip companies with a history of consistent dividend payments, ETFs like SCHD leverage the power of compounding, such as Pfizer with 14 years of consecutive annual dividend increases.
- While some critics argue that SCHD lags behind the S&P 500, a closer look at their performance history reveals that, for shorter timeframes, the gap is not as significant as it may seem, and SCHD's lower technology exposure may provide a more balanced portfolio.
- To maximize returns from SCHD investments, it's essential to reinvest dividends, enabling compounding and potentially creating a self-sustaining portfolio over time, contributing to the ultimate goal of securing a lifetime of wealth.
