A Top-Tier Dividend ETF for Long-Term Wealth Building

Key Points

• The Schwab U.S. Dividend Equity ETF (SCHD) applies a rigorous screening process, ensuring high-quality investments.

• SCHD currently delivers a dividend yield roughly three times that of an S&P 500 ETF.

• Holding SCHD in a Roth IRA allows investors to benefit from tax-free compounding and dividend payouts.

Exchange-traded funds (ETFs) rank among my preferred investment vehicles because they address multiple financial goals simultaneously. They offer diversification, require minimal management, and can serve as a reliable income stream. This is precisely why I favor the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD).

SCHD serves as a cornerstone dividend ETF in my portfolio. I have continued to increase my position this year and intend to maintain this strategy for the foreseeable future. For anyone seeking a premium ETF to enhance their portfolio, SCHD is highly deserving of consideration.

SCHD provides exposure to well-established companies

SCHD comprises 102 stocks that satisfy five essential criteria:

1. At least 10 consecutive years of dividend payments
2. At least five years of dividend growth
3. An above-average dividend yield
4. Strong free cash flow relative to debt
5. A strong return on equity, reflecting capital efficiency

When a company meets these benchmarks, it generally represents a sound investment, meaning SCHD functions as an organic vetting process. Investors can trust that they are backing solid companies with proven track records. The fund’s top sectors include healthcare (20.72%), consumer staples (20.38%), energy (14.7%), industrials (11.55%), and financials (10.05%), which aligns perfectly with the generally mature, cash-generative nature of these industries.

Notable holdings within SCHD include Merck, Coca-Cola, Chevron, UnitedHealth Group, and Procter & Gamble.

Image source: Getty Images.

A dividend worth holding on to for the long haul

SCHD has delivered impressive performance this year, generating total returns of 29% compared to the S&P 500‘s (SNPINDEX: ^GSPC) 13.7% (as of Sept. 7). While this appreciation is welcome, investors should not expect such consistent outperformance as a standard. The enduring appeal of SCHD lies in its robust dividend yield and stability.

SCHD’s current dividend yield stands at 3%, which is more than triple the yield of an S&P 500 ETF. Although this is slightly below its three-year average, the trade-off reflects the ETF’s significant appreciation over that period.

SCHD Dividend Yield data by YCharts

While the yield will inevitably fluctuate, a long-term yield of at least 3% makes SCHD highly worth holding. Admittedly, some individual stocks offer higher yields, but they come with company-specific risks that a diversified dividend ETF mitigates.

For those with a Roth IRA, purchasing SCHD shares within that account is a strategic move to leverage tax-free compounding. By reinvesting dividends to accumulate more shares over time, investors can enjoy tax-free cash payouts in retirement—specifically, after reaching age 59 1/2 and making a qualifying contribution at least five years prior.

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

Given its proven track record, rigorous screening process, and strong yield, SCHD stands out as an exceptional choice for investors seeking reliable, long-term dividend income.

Stefon Walters has positions in Coca-Cola. The Motley Fool has positions in and recommends Chevron and Merck. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.

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