This 1 Simple ETF Could Turn $250 a Month Into Over $450,000 #NewsETFs

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 froma 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:

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.

Should you invest $1,000 in Schwab U.S. Dividend Equity ETF right now?

Before you buy stock in Schwab U.S. Dividend Equity ETF, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Schwab U.S. Dividend Equity ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $845,679!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*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.