Key Points
The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is a popular exchanged-traded fund (ETF) among dividend investors. It tracks the Dow Jones U.S. Dividend 100 Index, a diverse basket of stocks with track records of paying and increasing their dividends. Additionally, the ETF yields about 3.3%, well above the 1% you’ll get from your typical S&P 500 index fund.
To invest in SCHD and earn $1,000 in passive income each month, you’ll need 11,429 shares. That works out to an investment of $377,157, based on a share price of $33 and a trailing-12-month dividend of $1.05 per share. Technically, SCHD pays quarterly dividends, so you’d receive $3,000 every three months.
Don’t let that number intimidate you. Here are two important reasons why it’s more doable than it looks.
You can reinvest the dividends
Very few people actually have hundreds of thousands of dollars lying around. This is a long-term goal, and a very doable one at that. That’s because you’re not going to build your savings up dollar by dollar in a savings account. Instead, you can invest your money in SCHD as you save it, building that dividend income one share at a time. You’ll also want to reinvest the dividends to speed things up.
It’s a much lower bar to feel the impact of reinvesting dividends. All else being equal, once you reach 126 shares of SCHD, the dividends will be large enough to buy an additional share each quarter. That’s without you adding any new funds. At $33 per share, it only takes about $4,158 to reach that first milestone. It only snowballs from there.
The dividend will increase over time
Remember, an ETF is simply a bucket of individual stocks trading under one ticker symbol. The Schwab U.S. Dividend Equity ETF contains established, blue chip dividend stocks, including Abbott Laboratories, Home Depot, Coca-Cola, Procter & Gamble, PepsiCo, and Chevron. These companies have grown consistently for decades and will likely continue to do so.
As these companies increase their dividends, so will SCHD. The ETF has delivered very strong dividend growth over the years, raising its dividend by over 522% since its inception in late 2011. It’s not a straight line higher, but the long-term results speak for themselves.
Data by YCharts.
Early on in this journey, it will seem like nothing is happening. The dividends will trickle in. However, three things will happen over time:
All of a sudden, the compounding will begin to matter, and it can become quite powerful over time. Hitting that $1,000 monthly average in passive income won’t happen overnight, and probably not in a year or two. But if you make it a long-term goal and stick with it, you’ll be surprised by how quickly it can become a reality.
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Justin Pope has positions in PepsiCo. The Motley Fool has positions in and recommends Abbott Laboratories, Chevron, and Home Depot. The Motley Fool has a disclosure policy.
