Dividend investing is often associated with retirees looking for passive income to cover living expenses. However, many investors, including young individuals, underestimate the importance of dividends in building wealth over time. Stock prices may fluctuate, but dividends provide a steady stream of income that can compound and grow over the years.
Since 1940, dividends have contributed about 34% of the S&P 500’s total returns. Reinvesting dividends can unlock another level of compounding that can lead to immense wealth. In fact, reinvested dividends account for 85% of the S&P 500’s total returns since 1960. This highlights the power of dividends in generating long-term wealth.
One way to access a diversified portfolio of dividend-paying stocks is through exchange-traded funds (ETFs). The Schwab U.S. Dividend Equity ETF (SCHD) is considered one of the best dividend ETFs available. This ETF holds 103 individual stocks that replicate the Dow Jones U.S. Dividend 100 index. By investing in SCHD, you own tiny pieces of these 103 companies across various industries.
The SCHD ETF is well-balanced, with top holdings in sectors like Financials, Healthcare, Consumer Staples, Industrials, and Energy. The fund’s diversification helps mitigate risk and provides exposure to a broad range of dividend-paying companies. Additionally, SCHD offers a relatively high yield of around 3.5%, compared to the S&P 500’s yield of 1.3%.
Moreover, the SCHD ETF has a track record of increasing dividends, with a 174% dividend growth over the past decade. The Dow Jones U.S. Dividend 100 index, which SCHD follows, selects financially healthy companies that generate a high return on equity and are raising their dividends. This strict scoring system ensures that the index includes companies with strong fundamentals and dividend growth potential.
While SCHD may have lower exposure to technology stocks compared to the S&P 500, it has proven to be a reliable fund for investors seeking to increase their passive income through dividends. The fund’s consistent dividend growth and diversified holdings make it an attractive option for long-term investors looking to build wealth over time.
Before investing in the Schwab U.S. Dividend Equity ETF, it’s essential to consider your investment goals and risk tolerance. While SCHD offers a solid foundation for dividend investing, it’s crucial to conduct thorough research and consult with a financial advisor to ensure it aligns with your overall investment strategy.
In conclusion, dividend investing is not just for retirees; it’s a strategy that can benefit investors of all ages. By focusing on dividends and reinvesting them over time, individuals can build a portfolio that generates passive income and grows wealth for the long term. The SCHD ETF is a prime example of a well-balanced fund that offers both income and growth potential for investors seeking decades of passive income.
