Many investors often dismiss dividend stocks as boring investments, preferring the excitement of growth stocks. However, a closer analysis reveals that their returns are anything but mundane. Over the past five decades, dividend-paying stocks have outperformed their non-dividend counterparts by a ratio of more than two-to-one.
A prominent player in this space is the Schwab U.S. Dividend Equity ETF, which has effectively illustrated the power of dividend investing since its inception in October 2011. This exchange-traded fund boasts an impressive 12.9% annualized return, substantiating the viability of its investment strategy.
The Schwab U.S. Dividend Equity ETF operates under a straightforward premise. It tracks the Dow Jones U.S. Dividend 100 Index, designed to measure the performance of 100 high-yield dividend stocks. The index evaluates companies based on several dividend quality characteristics, including dividend yield and the growth rate of dividends over a five-year period. This emphasis on dividend growth is pivotal, as historical data indicates a trend: companies that consistently increase their dividends tend to yield the highest long-term returns.
Breaking down the average annual total returns, dividend growers and initiators have recorded a substantial 10.2% return, while traditional dividend payers delivered 9.2%. Conversely, companies that opted not to change their dividends saw a modest return of 6.8%, and those that cut or eliminated their dividends faced losses, averaging -0.9%. In contrast, non-payers achieved a 4.3% return, while an equal-weighted S&P 500 index managed a return of 7.7%.
The superior returns of dividend growers are attributed to their blend of income and earnings growth. An increasing dividend provides a steady income stream, while growing earnings typically enhance share price appreciation. As of its last annual reconstitution in March, the Schwab U.S. Dividend Equity ETF held 100 companies with an average dividend yield of 3.8% and an impressive 8.4% annualized growth in dividends. For context, the S&P 500 currently yields only 1.2%, with a 5% increase in dividends over the previous five years. This indicates that SCHD’s higher yield and growth potential could translate into elevated total returns in the future.
Notably, among the ETF’s top ten holdings are industry leaders Coca-Cola and PepsiCo, each holding a 4% allocation. Coca-Cola boasts a 2.6% dividend yield and has just raised its dividend by 4%, extending its repertoire of consecutive annual increases to 64 years, solidifying its status as a “Dividend King.” Since 2010, Coca-Cola has distributed over $100 billion in dividends. PepsiCo, likewise, increased its dividend by 4%, marking 54 consecutive years of dividend growth and achieving a 7% compound annual increase since 2010.
The long-term performance of these stocks is compelling; since 1990, an investment in Coca-Cola has yielded a 10.6% annualized total return, while PepsiCo delivered a 10.4% annualized total return. Both companies plan to continue their dividend growth; Coca-Cola aims for an organic revenue growth of 4% to 6% and a 7%-9% growth in earnings per share, while PepsiCo targets similar levels.
The Schwab U.S. Dividend Equity ETF’s strategy of targeting high-yielding, dividend-growing stocks has proven successful over the years. As blue-chip companies like Coca-Cola and PepsiCo persist in raising their dividends, the ETF stands to provide a growing income stream for its investors, accompanied by the appreciation of its stock holdings. This well-strategized approach positions the Schwab U.S. Dividend Equity ETF as a strong candidate for individuals seeking long-term investment stability and growth.
