Dividend stocks make great long-term investments. For example, an investor who bought $100 worth of average dividend stocks in 1973 would have seen that investment grow to over $8,700 as of the end of 2023, according to a study from Hartford Funds and Ned Davis Research. That's 10 times more than they would have ended up with through those 50 years by investing in the average non-dividend payers (less than $850). That investor would have made even more money (over $14,100) if they used their $100 to buy companies that hiked their dividends.
Given the generally superior returns of dividend growers, they're no-brainer investments. One of the easiest ways to invest in the market's top dividend growth stocks is through an exchange-traded fund (ETF) that's focused on them, like the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD).
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Sticking to the top dividend stocks
The Schwab U.S. Dividend Equity ETF has a simple strategy: It tracks the Dow Jones U.S. Dividend 100 index. The creators of that index designed it to "measure the performance of high-dividend-yielding stocks in the U.S. with a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios."
The index holds shares of 100 companies known for the quality and sustainability of their dividends. Further, they also tend to have exceptional records for growing their payouts.
For example, the dividend ETF's top holding is Pfizer (NYSE: PFE), accounting for 4.3% of its net assets. The global pharmaceutical giant has paid dividends for 345 consecutive quarters. It most recently increased its payment in December, extending its dividend-hiking streak to over a decade and a half. Pfizer also fits the index's mandate of including stocks with higher yields. At the current share price, it yields more than 6.5%, well above the S&P 500's average of 1.2%.
Coca-Cola (NYSE: KO) is another notable holding -- the third largest, amounting to 4.1% of its assets. The beverage giant delivered its 62nd consecutive annual dividend increase last year. That kept it in the elite group of Dividend Kings, companies with payout-hiking streaks of 50 years or more. Coca-Cola also offers a high dividend yield of 3.1%.
A steady wealth creator
The Schwab U.S. Dividend Equity ETF's focus on dividend growth stocks has paid off for its investors over the years. The ETF has delivered a 12.9% annualized total return since its inception in October 2011, growing a $100 investment into over $500. It has also delivered annualized returns of slightly more than 11% over the past five- and 10-year periods. For comparison, the average dividend growth stock has delivered a 10.2% annualized return over the last 50 years, according to data from Ned Davis Research and Hartford Funds.
The ETF currently offers investors an attractive income stream. Its dividend yield based on distributions over the past 12 months is 3.6%. At that rate, every $100 invested in the fund would produce $3.60 of dividend income each year. That income stream should grow as the fund's holdings continue increasing their payouts.
SCHD Dividend data by YCharts.
To achieve the best total returns, fund holders can reinvest their dividends into more shares of the ETF. That would accelerate the growth of their income stream and their invested capital. Then, when they need income to cover their expenses in retirement, they can turn off auto-reinvestment and start taking those dividend payments in cash.
A great dividend ETF
The Schwab U.S. Dividend Equity ETF invests in 100 of the top dividend stocks. That strategy positions it to produce above-average total returns over the long term, given the historical outperformance of dividend stocks, especially those that regularly increase their payouts. This strong return potential makes it a no-brainer pick for those with a little bit of cash to invest.
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Matt DiLallo has positions in Coca-Cola. The Motley Fool has positions in and recommends Pfizer. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
