Dividend stocks make great long-term investments. For example, an investor who bought $100 worth of average dividend stocks 50 years ago would have seen that investment grow to over $8,700, according to a study from Hartford Funds and Ned Davis Research. That's 10 times more than they would have earned by investing in the average non-dividend payers (less than $850). That investor would have made even more money if they used it to buy companies that hiked their dividends (more than $14,100).
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) focused on them, like the Schwab U.S. Dividend Equity ETF (SCHD -0.55%).
Focused on 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 dividends.
For example, the dividend ETF's top holding is Pfizer (PFE -0.43%), 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%.
NYSE: PFE
Key Data Points
Coca-Cola (KO -0.46%) 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 50 or more years of increasing their dividend payments. 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 buying 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.
