The keys to a richer retirement come down to three factors: how much you invest, how long you invest that money, and the return you earn on your investment. The more of each input you have, the richer you’ll become in retirement.
Because of that, retirement is more of a math exercise than anything else. If you know some of the inputs, you can play around with an online retirement calculator to figure out the missing piece.
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For example, the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) has delivered an average annual total return of 12.1% since its inception in 2011. At that rate, the exchange-traded fund (ETF) could grow a $250-a-month investment into $1 million in about 31 years.
Here’s a closer look at how this ETF’s brilliant strategy has enriched its investors over the years and why it could continue to do so in the future.
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Focused on proven winners
The Schwab U.S. Dividend Equity ETF has a very simple investment strategy. It aims to closely track the Dow Jones U.S. Dividend 100 index, which tracks 100 top dividend stocks. It screens companies on the quality of their dividends based on several factors, including their ability to grow their dividends.
That latter factor is worth highlighting, given the data on the investment returns of stocks over the years based on their dividend policy:
Dividend Policy | Average Annual Total Returns |
|---|---|
Dividend growers & initiators | 10.2% |
Dividend payers | 9.2% |
No change in dividend policy | 6.8% |
Dividend cutters & eliminators | -0.9% |
Dividend non-payers | 4.3% |
Equal-weighted S&P 500 index | 7.7% |
Data source: Ned Davis Research and Hartford Funds. Note: Returns data from 1973-2024.
As that data shows, the average dividend stock has delivered more than double the return of dividend non-payers over the past 50 years (9.2% average annual return compared to 4.3%). However, there’s a big difference in the performance of dividend stocks by their policy, with the best returns coming from dividend growers and initiators (10.2%).
The fund’s strategy of focusing on dividend stocks gives it a leg up in producing above-average total returns over the long term.
Focused on the cream of the crop
The Schwab U.S. Dividend Equity ETF enhances its ability to generate above-average returns by tracking an index focused on dividend quality. The Dow Jones U.S. Dividend 100 index screens companies based on their five-year dividend growth rate and other quality factors, like their balance sheet strength (cash flow to total debt) and financial performance (return on equity). Those latter factors tend to be good gauges of whether a company can sustain and grow its payout in the future.
Each year, the index removes stocks that no longer meet its criteria, replacing them with even higher-quality dividend stocks. This strategy of focusing on the best dividend stocks based on dividend sustainability and quality should yield higher returns over the long term.
The fund’s recent reconstitution further enhanced its focus on dividend growth. It removed some companies that reduced their dividends or delivered below-average dividend growth and replaced them with companies delivering faster dividend growth. Its current holdings have grown their payouts by an average of 8.4% annually over the past five years, a tick faster than the 7.9% average annual growth rate its holdings delivered before the annual reconstitution. That faster dividend growth rate should enhance the fund’s ability to produce strong total returns in the future.
This ETF’s smart investment strategy should pay big dividends in retirement
The Schwab U.S. Dividend Equity ETF focuses on investing in dividend stocks, which have proven to be winning long-term investments. It takes things further by tracking an index focused on the highest-quality dividend stocks with strong records of dividend growth.
This brilliant strategy should enable the fund to continue producing strong total returns over the long term. While there’s no guarantee it can continue delivering a 12%+ annual return, its strategy of investing in dividend growth stocks makes it much more probable that the fund can produce enriching returns over the long term, which should help its investors retire more comfortably.
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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.
