Key Points
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SCHD provides exposure to roughly 100 top dividend-paying companies selected based on dividend and financial quality traits.
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The ETF offers an attractive dividend yield, a history of dividend growth, and a very low expense ratio of 0.06%.
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Reinvesting dividends and holding for decades could turn a modest initial investment into a meaningful long-term nest egg.
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You don’t need a lot of money to start investing. Even $500 can grow into a meaningful amount of wealth over time if you invest it wisely and give it enough time to compound. If I only had $500 to invest right now and couldn’t touch the money for the next 25 years, I’d put it into the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD).
Here’s why I think it’s an excellent long-term investment.
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Investing in top-tier dividend stocks
I think the Schwab U.S. Dividend Equity ETF is one of the best ETFs to buy for the long term. It passively tracks an index (Dow Jones U.S. Dividend 100 Index) that screens companies based on several dividend quality characteristics, including dividend history, five-year growth rate, yield, and financial strength.
That focus on dividend quality and growth is worth noting. According to data from Ned Davis Research and Hartford Funds, companies that grow their dividends have historically delivered a 10.2% annualized total return over the last 50 years, significantly outperforming companies with no dividend changes, dividend cutters, and those that don’t pay dividends. SCHD’s focus on the best dividend stocks has paid off. It has delivered a 13.1% annualized total return since its inception in 2011.
The fund currently holds 100 high-quality, higher-yielding dividend stocks. It has delivered a 3.2% dividend yield over the last 12 months, roughly triple the S&P 500‘s level (currently yielding 1.1%). SCHD provides access to these top dividend stocks for a very reasonable fee (0.06% expense ratio).
What $500 could become over 25 years
SCHD has been a wealth compounding machine over the years. Thanks to its robust returns, a $500 investment in SCHD at its inception 15 years ago would be worth about $3,456 today, assuming reinvestment of dividends. Here’s a hypothetical look at what $500 could become over the next 25 years at different return scenarios:
Image source: Author’s chart.
SCHD has delivered an annualized total return of approximately 13.1% since its inception. If it maintained that pace over the next 25 years, a $500 investment would grow to nearly $10,900 with dividends reinvested.
However, expecting that performance to continue might be overly optimistic. Even at a more modest 10.2% annualized return, consistent with the historical performance of dividend-growth stocks over the past 50 years, that $500 would grow to nearly $5,700. At an even more conservative 6% annualized return, it would still grow to more than $2,100.
While the base case of $5,700 isn’t necessarily life-changing money, it’s a more than 10-fold return from a relatively lower-risk investment. You’d need to invest more than $500 over the next quarter century to comfortably retire. A good place to start is to invest $500 per month in SCHD, which would grow to over $640,000 in 25 years at a 10.2% annualized return.
A great place to park $500
SCHD won’t outperform the market every year, and its stock holdings will experience volatility along the way. However, its focus on financially strong dividend-paying businesses, growing income potential, and minimal fees makes it an excellent candidate for a long-term portfolio. If I only had $500 to invest today, I’d be comfortable putting it into SCHD and letting the power of compounding work for the next 25 years.
Should you buy stock in Schwab U.S. Dividend Equity ETF right now?
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Matt DiLallo has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
