Investing $275 Monthly in SCHD Could Build Serious Passive Income Over 20 Years

Key Points

• The Schwab U.S. Dividend Equity ETF's current holdings have grown their dividends at more than 9% annually over the last five years.
• The fund has delivered more than 9% annual share price appreciation since its inception in 2011.
• It currently yields 3% based on its trailing 12-month dividend rate and recent share price.
• 10 stocks we like better than Schwab U.S. Dividend Equity ETF ›

Investing $275 a month into the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) could build significant passive dividend income over the next two decades. If the leading dividend ETF grows its dividend and share price at 9% compound annual rates, and you reinvest all dividends, it would produce over $7,360 in annual dividend income by 2046.

Here's a look at how compounding could turn a relatively modest monthly investment into a growing stream of dividend income over the next two decades.

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Modeling the income potential

The Schwab U.S. Dividend Equity ETF recently traded at around $33.75 per share. The top ETF has paid dividends at a 3% yield over the last 12 months. The fund's share price has grown at a 9.8% annualized rate since its inception in 2011. Meanwhile, its current holdings have increased their dividends by an average rate of 9.4% over the past five years.

To be a little more conservative, I'm using an average annual growth rate of 9% for the dividend and share price over the next 20 years. If you invested $275 a month and reinvested your dividends, here's how much your dividend income would grow during that period:

At $275 a month, you'd only contribute $66,000 to buy shares of SCHD. That investment would generate almost $50,600 in cumulative dividend income over 20 years if you reinvest the dividends to buy more shares. By 2046, this steadily compounding investment would generate over $7,360 in dividend income each year.

Why SCHD should continue delivering a growing dividend

SCHD has a very straightforward investment strategy. The ETF aims to track the total return of the Dow Jones U.S. Dividend 100 Index. That index has stringent requirements. It screens companies based on four dividend quality characteristics: cash flow to debt, return on equity, dividend yield, and five-year dividend growth rate. It limits its membership to the top 100 companies that meet these screens. As a result, it holds 100 of the highest-quality high-yielding dividend growth stocks.

This dual focus on yield and growth should enable SCHD to continue paying a growing dividend while also delivering meaningful share price appreciation. However, that doesn't guarantee the fund will continue to deliver dividend growth or share price appreciation near its historical averages. If companies deemphasize dividend payments in the future, or there's a prolonged economic downturn, it could lead to slower dividend growth or even lower dividends.

A top-notch income-focused fund

SCHD tracks an index that aims to hold the highest quality, high-yielding dividend growth stocks. That puts the fund in a strong position to continue paying a growing dividend while also delivering a rising share price. While neither is guaranteed, there's a reasonable expectation that this fund can deliver an above-average yield and strong dividend growth rate in the coming decades.

Should you buy stock in Schwab U.S. Dividend Equity ETF right now?

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Matt DiLallo has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.