Investing in Dividend Stocks: A Steady Approach
Often, investors see dividend stocks as, well, a bit dull. They might lack the excitement of some high-growth stocks, but in terms of returns, they tell a different story. Over the last 50 years, stocks that pay dividends have significantly outperformed their non-dividend counterparts by more than double.
Take the Schwab US Dividend Stock ETF, for example. Personally, I’ve really noticed the benefits of investing in dividends with this fund, which has achieved an annualized return of 12.9% since it started back in October 2011. So, what’s the deal?
Focusing on High Dividend Stocks
The strategy for the Schwab fund is straightforward. It’s based on the Dow Jones US Dividend 100 Index, which tracks the top 100 high-yield dividend stocks. Companies are evaluated on several key characteristics, including dividend yield and the growth rate of dividends over five years. Notably, the emphasis is on growth in dividends.
The evidence regarding dividend stocks is compelling. Companies that consistently elevate their dividends tend to provide the best long-term returns.
| Dividend Policy | Average Annual Total Return |
|---|---|
| Dividend Growers and Initiators | 10.2% |
| Dividend Payers | 9.2% |
| No Change in Dividend Policy | 6.8% |
| Dividend Cutters or Eliminators | -0.9% |
| No Dividend Payments | 4.3% |
| Equal Weight S&P 500 Index | 7.7% |
There’s a crucial relationship between revenue and profit growth that can drive the success of dividend-growing companies. When dividends increase, investors benefit from a steady rise in income, which can also lead to an uptick in stock prices.
The Schwab U.S. Dividend Stock ETF consists of 100 companies that not only pay higher dividends but also grow them at above-average rates. Recently, its stocks had an average dividend yield of 3.8% with an impressive annual growth rate of 8.4%. In contrast, the S&P 500 has a current yield of just 1.2% and a compound annual growth rate of 5% over the past five years. Given these numbers, SCHD seems poised for greater long-term total returns.
Strong Performance from Leading Brands
Interestingly, two of the top 10 holdings in the fund are noted beverage giants. Coca-Cola and PepsiCo each account for about 4% of the portfolio. Currently, Coca-Cola boasts a dividend yield of 2.6%, while PepsiCo’s is at 3.4%.
Coca-Cola just raised its dividend by 4%, marking an impressive 64-year growth streak. This achievement qualifies it to be termed a dividend king, a label reserved for companies that have boosted their annual dividends for over 50 years. Since 2010, Coca-Cola has returned over $100 billion to shareholders through dividends. On the other hand, PepsiCo has also recently raised its dividend by 4%, contributing to its own impressive 54-year streak, with a 7% compound annual growth rate since 2010.
The consistent performance of these companies has yielded substantial returns. Since 1990, investing in Coca-Cola has generated a total annual return of 10.6%, while PepsiCo notched 10.4%. Both remain well-positioned to keep raising their generous dividends. Coca-Cola aims for an annual revenue growth of 4% to 6% and an earnings per share increase of 7% to 9%. Similarly, PepsiCo set its sights on mid-single digit growth for revenues and high single digits for earnings per share. This upward trajectory in revenues should enable both firms to continue their strong dividend payments and potentially boost stock prices accordingly.
Leveraging Dividend Growth
The success of the Schwab U.S. Dividend ETF, which invests in stocks with high dividend growth, is clear. As companies like Coca-Cola and PepsiCo increase their dividends, ETFs provide more income to investors while also benefiting from rising stock values. This investment approach should keep delivering dividends, making the Schwab US Dividend Stock ETF an attractive option for long-term investors.
