Investing isn't all about chasing the highest stock prices. After all, stock prices can go down just as easily as up, and you only realize those investment returns when you sell the stock. That's why investing for dividend income can be a lucrative and satisfying strategy. With enough dividends, you can live off your portfolio's cash flow without selling a single share.
Many companies pay dividends, but you don't have to deal with sifting through them all if you don't want to. Instead, consider an exchange-traded fund (ETF), like the Schwab U.S. Dividend Equity ETF (SCHD 0.10%).
For just $500, you can add years of steady cash flow to your portfolio. Here is what you need to know.
Image source: Getty Images.
This ETF is the anti-AI investment
You've probably heard or read about artificial intelligence (AI) as the market's hottest theme right now.
Unfortunately, tech stocks aren't going to offer much cash flow for your portfolio. Most tech stocks pay paltry dividends because they are prioritizing AI investments. Those that do pay dividends tend to trade at high valuations, where higher share prices push the dividend yield lower.
It can be tempting to chase those hot AI stocks for their share price upside, but remember that volatility comes with that. When the stock market inevitably corrects or flat-out declines into a bear market, those technology stocks will probably fall the most.
The Schwab U.S. Dividend Equity ETF tracks the Dow Jones U.S. Dividend 100™ Index. Tech stocks comprise only 8.3% of the ETF, so it should hold up better than most other, more tech-heavy funds and market indexes if the red-hot tech trade cools off.
That probably sounds good to you if you're investing with portfolio cash flow in mind.
NYSEMKT: SCHD
Key Data Points
A foundation of dividend-paying winners
Instead of technology, the Schwab U.S. Dividend Equity ETF has higher weightings in other market sectors, such as energy, consumer staples, healthcare, and industrials.
Here are the ETF's top 10 holdings:
- Merck & Co
- Amgen
- Cisco Systems
- AbbVie
- Coca-Cola
- PepsiCo
- Bristol Myers Squibb
- Chevron
- Lockheed Martin
- ConocoPhillips
The two prevalent themes among the stocks in the Schwab U.S. Dividend Equity ETF are industry leadership and dividend growth.
Every company in this top 10 list has increased its dividend for at least eight consecutive years, and all but ConocoPhillips have done so for at least 14 years. Additionally, these companies are all at or near the top of their respective fields.
In other words, these are companies that have proven they possess the competitive advantages and growth to afford to cut increasingly larger dividend checks to shareholders year in and year out. Buying and holding these types of stocks tends to work out well over the long term.
Impressive cash flow from day one, growth likely ahead
It's time to dive into the numbers of what you actually get for your $500 investment.
The Schwab U.S. Dividend Equity ETF currently trades at about $27 per share. So, your $500 will buy you about 18 shares. The ETF pays a quarterly distribution (dividend), totaling $1.03 over the past four quarters. Therefore, you can expect approximately $18.60 in annual cash from your investment.
That may not sound like much, but there's more. Consider that the ETF's 3.87% distribution yield is a fantastic starting point, well above what many stocks offer. Additionally, the ETF will likely pay you more over time.
Below, the chart illustrates how the Schwab U.S. Dividend Equity ETF has increased its distributions as the companies it holds raise their dividends. The ETF's distribution has increased by a whopping 541% since the end of 2011!
Data by YCharts.
Your $18.60 in annual cash flow will likely continue going up, and that's before factoring in any additional money you invest in the future. If you stick with it, holding your shares, buying more, and reinvesting the dividends, the cumulative compounding can make an enormous difference over a decade or two.
That won't make you rich or pay all your bills with cash flow overnight, but it's a sound plan that can work wonders if you give it enough time.
