Building a Reliable Income Stream: Invest in Dividend Stocks

Creating a strong portfolio of dividend-paying stocks can offer years of passive income.

To ensure a steady income even in retirement, look for companies that not only offer solid dividends today but also have the potential to grow these payments over time. Historically, stocks that increase dividends have outperformed those that do not. Over the last 50 years, stocks with consistent dividend growth saw a compound annual return over one percentage point higher than those with unchanged dividends.

Fortunately, constructing a portfolio of promising dividend stocks isn’t overly complicated. By investing just $300 each month in a single ETF, you could eventually accumulate a portfolio capable of generating $50,000 in annual dividend income.

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The Top Dividend ETF for Long-Term Investors

Choosing the right ETF is crucial if you plan to invest for the long term. The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) stands out as an excellent option.

This fund tracks the Dow Jones U.S. Dividend 100 index, selecting 100 companies with over a decade of dividend-paying history. These companies are also evaluated for their financial health to ensure they can maintain and increase their dividends. This careful selection results in a portfolio of higher-quality companies compared to other ETFs focusing purely on high yields. High yield is of little use if it leads to a dividend cut.

The 10 largest holdings (and their yields) in the Schwab ETF are:

• Home Depot (2.1%)
• Blackrock (2.0%)
• Cisco Systems (3%)
• Chevron (4.4%)
• Lockheed Martin (2.2%)
• Bristol Myers Squibb (4.5%)
• Verizon Communications (6.2%)
• Pfizer (5.7%)
• Texas Instruments (2.7%)
• Abbvie (3.2%)

While these stocks all offer yields that exceed the S&P 500 average of 1.3%, some of the largest holdings have lower yields but strong growth potential. This could lead to a better yield on initial investments over time compared to simply choosing stocks with the highest current yields.

The Schwab fund has a very low expense ratio, with investors paying only 0.06% of assets in annual fees, helping to preserve your returns.

How to Achieve $50,000 in Dividend Payments with Regular Investments

Investing $300 per month in the Schwab U.S. Dividend Equity ETF can help you build a substantial portfolio over time. If you maintain this investment for 40 years, you could see a portfolio worth well over $1 million. It’s also reasonable to expect this portfolio to provide approximately $50,000 in annual dividends starting in year 41, with the potential for annual increases.

Since its inception in 2011, the ETF has achieved a 13.4% annualized return. However, expecting such high returns to persist over the next 40 years may be optimistic. A more moderate total return of around 10% aligns with historical performance for large-cap value stocks found in this fund.

The ETF’s 30-day yield stands at 3.6%, but adjustments may be necessary. Following the end of the Federal Reserve’s rate-raising campaign, a shift in capital from lower-risk investments like Treasury bonds to stocks is expected, which could lower overall dividend yields. Long-term projections suggest rates might settle about 2 percentage points lower than current levels.

Consequently, an approximate long-term yield of 3% seems reasonable. Given stock price appreciation, this may yield a lower percentage against a larger portfolio.

Here’s how a monthly $300 investment in the Schwab U.S. Dividend Equity ETF could grow over time:

Calculations by author.

This table represents a hypothetical scenario based on expected average returns and yields from the Schwab ETF. Bear in mind that stock market returns can fluctuate significantly from year to year. Some years may bring substantial gains while others may incur losses. The sequence of these fluctuations can greatly influence the final portfolio value, but over a longer investment period, returns are likely to align with average expectations.

Keep in mind, however, that $50,000 in 40 years may not hold the same value it does today due to inflation. Recent years have highlighted the effects of inflation, leading to a gradual decrease in purchasing power. Therefore, it might be wise to consider additional income sources or continued investment.

Is Now the Right Time to Invest $1,000 in Schwab U.S. Dividend Equity ETF?

Before making a purchase in the Schwab U.S. Dividend Equity ETF, consider the following:

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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbbVie, Bristol Myers Squibb, Chevron, Cisco Systems, Home Depot, Pfizer, and Texas Instruments. The Motley Fool recommends Lockheed Martin and Verizon Communications. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.