The Schwab U.S. Dividend Equity ETF (SCHD -1.43%) is one of the most popular dividend-focused ETFs. That’s because it offers a high current yield (3% over the trailing 12 months) and has a strong historical dividend growth rate (its holdings have grown their dividends at a more than 9% compound annual rate over the past five years). Thanks to its current high yield, you’d only need to invest $200,000 to generate $6,000 in annual dividend income ($1,500 quarterly, which is $500 per month). That’s a third of what you’d need to invest in an S&P 500 index fund to generate the same amount of annual dividend income, given its lower yield (1%).
You can also build toward $500 a month in passive dividend income with the Schwab U.S. Dividend Equity ETF. Here’s exactly how much you’d need to invest each month to reach your income target by the time you need it.
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Multiple pathways to $500 a month
It’s fairly easy to determine how much you’d need to invest right now to instantly generate your desired dividend income target over the next year. You take that goal ($6,000), divide it by the yield (3% for SCHD) to get the total upfront investment requirement ($200,000).
However, the lump-sum approach isn’t the only path. You can also take the monthly investment approach. This requires a bit more complex math, especially when you factor in growth. But don’t fret, I ran the models for you. Here are several scenarios that show exactly how much you’d need to invest each month to reach the $500 a month income target by year, all of which assume dividend reinvestment and a 9% average annual growth rate (dividend and share price):
|
Time Horizon |
Monthly Investment Needed |
Total Contributed |
|---|---|---|
|
10 years |
$896/month |
$107,462 |
|
15 years |
$418/month |
$75,281 |
|
20 years |
$215/month |
$51,485 |
|
25 years |
$115/month |
$34,455 |
|
30 years |
$63/month |
$22,620 |
Data source: Author’s calculations.
The power of compounding
The above table showcases the power of compounding over long periods. SCHD’s current holdings have grown their dividends at an average annual rate of more than 9% over the past five years. So, the shares you buy today will keep paying you more each year as you reinvest those dividends and SCHD’s holdings continue to grow their payouts. That’s why the longer your time horizon, the less capital you’d need to invest each month to reach your target.
Let’s take the 20-year example from above. You’d only need to invest $215 a month to reach $500 in monthly dividend income in 20 years. That’s a total contribution of $51,485 over that period, nearly 75% less than the $200,000 you’d need to invest today.
Schwab U.S. Dividend Equity ETF
Today’s Change
(-1.43%) $-0.49
Current Price
$33.84
Key Data Points
AUM
$112B
Dividend Yield
3.10%
Expense Ratio
0.06%
Top Holdings
MRK
4.74%
ABT
4.43%
CVX
4.34%
This all assumes SCHD grows its dividend by around 9% per year and delivers similar stock price appreciation, neither of which is guaranteed. However, it gives you an idea of how much you’d need to invest to reach your target if SCHD continues to deliver growth similar to its historical average.
SCHD is an income machine
SCHD has an excellent track record of paying an above-average and steadily growing dividend. So, whether you can invest $200,000 up front or a couple of hundred dollars each month, you can build your way to generating $500 a month in dividend income. SCHD’s growing income stream is why it ranks as one of the best ETFs to buy.
