The dream of many investors is to create a portfolio that does the work for you: to build a big enough portfolio that the long-term power of compounding does more for your wealth creation than you are.
The good news is that it’s very achievable. With the proper planning, discipline, and long-term commitment, you can create a substantial passive income stream that helps get you closer to retirement or just pay the bills.
But you need to know what it takes to get there. Without a plan, it’s little more than hope. Understanding the numbers and choosing the right exchange-traded fund (ETF) is the plan that actually gets you there.
The right ETF for me is the Schwab U.S. Dividend Equity ETF (SCHD +0.86%).
Image source: Getty Images.
How SCHD creates a $500-per-month passive income stream
Before we get into why the Schwab U.S. Dividend Equity ETF is the right fund for the job, let’s look at the numbers.
Generating $500 per month equates to $6,000 per year. The fund’s current yield is right around 3.3%. Taking the $6,000 per year income goal and dividing it by the 3.3% yield, you’d need an initial investment of just under $182,000 to make it happen. At a current price of $33.47, you’d need to buy around 5,433 shares.
That’s not an insignificant amount of money. But even if you don’t have that now, you can begin working toward it with an automatic monthly investment plan and regular dividend reinvestments. Very few people start with that kind of capital, but the “brick-by-brick” approach can get you there in time.
Schwab U.S. Dividend Equity ETF
Today’s Change
(0.86%) $0.29
Current Price
$33.85
Key Data Points
AUM
$105B
Dividend Yield
3.10%
Expense Ratio
0.06%
Top Holdings
ABT
4.72%
AMGN
4.30%
MRK
4.28%
Why SCHD is the right dividend ETF for this goal
The Schwab U.S. Dividend Equity ETF is based on dividend growth, dividend quality, and high yield. It focuses on investing in companies that demonstrate strong, healthy balance sheets and a history of paying and growing their dividends.
The final portfolio of roughly 100 stocks tends to be more value-oriented and a bit boring. The top five holdings (and their portfolio weight) currently are:
- Abbott Laboratories: 4.7%
- Amgen: 4.4%
- Merck: 4.4%
- Coca-Cola: 4.3%
- UnitedHealth Group: 4.2%
In other words, this group contains none of the big tech, artificial intelligence (AI), or semiconductor names that have dominated the news cycle.
In fact, tech is only the 6th-largest sector holding in the fund, accounting for just 9% of assets. Healthcare and consumer staples each have a 20% weighting, and energy comes in third with 14%.
That’s exactly why this fund works. It’s not overvalued. It’s heavily invested in mature, well-established companies built to withstand more challenging economic environments and continue distributing dividends to shareholders.
If you’re looking to build a consistent income stream from your portfolio, whether it’s $100 a month, $500 a month, or even more, the Schwab U.S. Dividend Equity ETF is the right fund to do it with.