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Many investors view dividend stocks as unexciting, but their performance over time has been anything but. Over the past 50 years, dividend stocks have outperformed non-dividend payers by more than two-to-one.
The Schwab U.S. Dividend Equity ETF (SCHD) has demonstrated the potential of dividend-focused investing since its launch in October 2011. The fund has delivered a 12.9% annualized return over that period. Below is a breakdown of the strategy and key factors behind its results.
SCHD tracks the Dow Jones U.S. Dividend 100 Index, which measures the performance of 100 high-yield dividend stocks. The index applies screens based on four dividend quality characteristics, including dividend yield and the five-year dividend growth rate. The emphasis on dividend growth is central to the approach.
The underlying data on dividend stocks points to a consistent long-term pattern: companies that steadily grow their dividends tend to deliver stronger returns than those that do not.
A key driver of higher returns for dividend growers is the combination of rising dividend income and earnings growth. As dividends increase, investors receive a steadily growing base return, while improving earnings support share price appreciation.
SCHD holds 100 companies with higher dividend yields and dividend growth above average. After its most recent annual reconstitution in March, the fund’s holdings had an average dividend yield of 3.8% and were growing dividends at an 8.4% annualized rate. By comparison, the S&P 500 yields 1.2% and has delivered 5% compound annual dividend growth over the last five years. The fund’s higher yield and faster dividend growth are intended to support stronger long-term total returns.
Two of SCHD’s top 10 holdings are Coca-Cola and PepsiCo, each with a 4% allocation. Both are dividend growth leaders. Coca-Cola currently offers a 2.6% dividend yield, while PepsiCo’s payout is 3.4%.
Coca-Cola recently increased its dividend by 4%, extending its streak to 64 consecutive years of annual increases. The company has paid out more than $100 billion in dividends since 2010 and remains part of the “Dividend Kings,” companies with at least 50 years of consecutive annual dividend growth.
PepsiCo also raised its dividend by 4%, extending its streak to 54 consecutive years. Since 2010, PepsiCo has grown its dividend at a 7% compound annual rate.
That consistent dividend growth has translated into strong long-term performance. Since 1990, an investment in Coca-Cola has produced a 10.6% annualized total return, while an investment in PepsiCo has produced a 10.4% annualized total return.
The companies’ long-term growth targets are designed to support continued dividend increases. Coca-Cola’s long-term targets call for 4% to 6% annual organic revenue growth and 7% to 9% earnings-per-share growth. PepsiCo’s targets are mid-single-digit organic revenue growth and high-single-digit earnings-per-share growth.
With earnings growth expected to continue, both companies are positioned to raise dividends while also supporting price appreciation—factors that can help sustain meaningful total returns for investors.
SCHD’s strategy of investing in high-yield dividend growth stocks has been rewarded over time. As holdings such as Coca-Cola and PepsiCo increase their dividends, the ETF receives a growing stream of dividend income to distribute to investors, while also benefiting from the rising value of its stock holdings.
With dividend growth remaining a core element of the index methodology, the strategy is intended to continue delivering dividend income for long-term investors, making SCHD positioned as a long-term holding.
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