Investing in the stock market is a great way to grow your wealth. Where things get tricky is deciding where to invest your money. You can build a portfolio of stocks you actively manage, which could grow your nest egg over time if you pick the right ones.
A simpler solution is to invest in an exchange-traded fund (ETF). While there are many to choose from, a great wealth-building option is the Schwab U.S. Dividend Equity ETF(NYSEMKT: SCHD). The fund focuses on companies that pay a growing dividend because they have historically delivered the highest total returns over the long term. Investing $250 a month into this ETF could grow to more than $450,000 in 25 years.
The data on dividends
Dividend stocks have been powerful wealth creators over the long term. Ned Davis Research and Hartford Funds dug into the data on dividends. They found that the average dividend payer in the S&P 500 delivered a 9.2% average annual total return during the last five decades. That outperformed the average stock in the broad market index (7.7% return for an equal-weighted S&P 500 index). Dividend payers also outperformed dividend nonpayers by two-to-one (4.3% return for nonpayers).
However, they found a significant distinction between a stock's return and its dividend policy:
Dividend policy | Average annual total returns |
|---|---|
Dividend growers & initiators | 10.2% |
No change in dividend policy | 6.6% |
Dividend cutters & eliminators | -0.6% |
Data source: Ned Davis Research and Hartford Funds. (Note: Data from 1973-2023)
As that table shows, dividend growers and initiators delivered the best returns by far. Companies with no change in their dividend policy (i.e., those that didn't routinely increase their payouts) underperformed the average stock in the S&P 500. Meanwhile, dividend cutters and eliminators historically delivered negative returns.
Focused on the top-tier dividend stocks
Schwab U.S. Dividend Equity ETF has a very simple strategy: It aims to track the Dow Jones U.S. Dividend 100 Index, which measures the performance of 100 U.S. stocks with high dividend yields. It picks companies with a consistent record for paying dividends and stronger financial metrics than their peers. In essence, this ETF holds about 100 of the country's top dividend stocks.
That strategy has paid big dividends over the years (pardon the pun). Since the fund's inception, it has delivered an average annual total return of 12.5%. A big driver of those returns is dividend growth. Most of its holdings have a long record of increasing their dividends. Because of that, the fund has steadily raised the distributions it pays to its investors:
SCHD Dividend data by YCharts
While past performance doesn't guarantee future success, the fund's focus on companies that pay a growing dividend bodes well for its ability to continue producing strong returns. If it can maintain its historical rate of return (12.5% annually), the fund could grow an investment of $250 a month into over $450,000 in 25 years (assuming you reinvest your dividends).
The ETF is a very passive investment because it tracks an index of top dividend stocks. The index will swap out companies no longer among the top 100 dividend payers, replacing them with stronger ones. Because the index managers are doing all the work, investors can sit back and watch the fund grow their wealth as the underlying companies increase their earnings and dividend payments.
A simple way to grow your wealth
Dividend stocks are proven wealth creators. That's evident in the returns of the Schwab U.S. Dividend Equity ETF since its inception. Given its focus on the top dividend stocks, the fund should continue to produce attractive total returns. That makes it a simple way to grow your wealth over the long term.
Don’t miss this second chance at a potentially lucrative opportunity
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
- Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $21,285!*
- Apple: if you invested $1,000 when we doubled down in 2008, you’d have $44,456!*
- Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $411,959!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
*Stock Advisor returns as of October 14, 2024
Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
