I enjoy earning passive income because it gives me extra money without working. This income lets me invest more and will help me retire comfortably one day.
Among my investments, I am especially drawn to the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). This fund offers a 4% dividend yield, which is about three times higher than the S&P 500’s average yield of 1.3%.
This means I earn more income for every dollar I invest. The fund also has a strong history of increasing its dividends, promising growing income over time. That’s why I keep buying more shares.
How the ETF Chooses Stocks
The Schwab U.S. Dividend Equity ETF follows the Dow Jones U.S. Dividend 100 Index. This index picks 100 top dividend stocks each year based on four key factors:
- Cash flow compared to total debt
- Return on equity (ROE)
- Dividend yield
- Five-year dividend growth rate
These criteria help the fund select companies that pay reliable, high dividends and have strong growth potential. Each year, the index updates its list to drop weaker dividend stocks and add better ones.
At its last update in March, the fund’s 100 stocks had an average dividend yield of 3.8% and had grown dividends by 8.4% annually over five years. This mix offers investors both steady income and growth.
Key Holdings and Growth Potential
One important holding is oil company ConocoPhillips (NYSE: COP), the fund’s sixth-largest stock. It pays a 3.7% dividend and has raised its payout rapidly: 34% in 2024, 14% in 2023, and 11% in 2022. The company expects to keep growing dividends faster than most S&P 500 firms. Its investments in LNG and Alaska projects should add $6 billion in free cash flow soon, supporting strong dividend growth through 2029.
A Proven Income Strategy
The fund’s focus on dividend growth has rewarded investors. Though dividends vary each quarter, they have steadily increased over time. This steady income boost helps the fund deliver strong total returns from both dividends and stock price gains.
Historically, dividend growth stocks have returned an average of 10.2% per year over 50 years. This beats companies that keep dividends flat (6.8%), those that don’t pay dividends (4.3%), and those that cut dividends (-0.9%). While past results don’t guarantee future success, the fund’s approach offers a promising way to build passive income and wealth.
