Want Decades of Passive Income? This Dividend ETF Can Generate $500 per Month.
Collecting paychecks without doing anything may sound like a fantasy. But if you invest in dividend exchange-traded funds (ETFs), it can become your reality.
If you find the right dividend ETF, you could own a portfolio of high-quality stocks that pay above-average yields and have a long history of paying and growing their dividends. Capturing steady and even increasing passive income for decades is well within the reach of almost anyone.
In my opinion, the best dividend ETF for achieving this is the Schwab U.S. Dividend Equity ETF (SCHD -0.17%). It considers elements of balance sheet quality, high yield, and dividend growth to produce one of the most well-rounded portfolios there is.
Image source: The Motley Fool.
SCHD is much more than just a high yield
The first thing that stands out when you look into this ETF might be its 3.2% yield, which is triple that of the Vanguard S&P 500 ETF (VOO +0.03%).
But income is just one component. Portfolio quality is the other big advantage.
The Schwab U.S. Dividend Equity ETF‘s index uses several fundamental measures to identify quality dividend stocks. These include cash flow-to-debt, return on equity (ROE), dividend yield, and 5-year dividend growth rate. In other words, it doesn’t just look for yield. It looks for yields that are stable today and sustainable well into the future.
The portfolio consists of large, durable companies such as Coca-Cola, Home Depot, Chevron, and Procter & Gamble. These are businesses built to withstand and thrive even in challenging market and economic environments. That can mean lower volatility and steadier growth for the long term.
Schwab U.S. Dividend Equity ETF
Today’s Change
(-0.17%) $-0.06
Current Price
$35.05
Key Data Points
AUM
$112B
Dividend Yield
2.99%
Expense Ratio
0.06%
Top Holdings
MRK
5.02%
ABT
4.90%
AMGN
4.81%
Here’s what it takes to generate $500 per month with SCHD
Figuring out what’s needed to produce this kind of income is a simple math calculation.
Earning $500 a month means generating $6,000 a year in dividends. If you divide $6,000 by the fund’s current 3.2% yield, you get a required investment account balance of roughly $187,500.
It’s worth noting that the Schwab U.S. Dividend Equity ETF distributes dividends quarterly. Investors wouldn’t literally get $500 per month in this scenario. They’d be getting $1,500 per quarter. Plus, the fund’s yield fluctuates regularly, so the income may vary as well.
It’s important to think long-term with SCHD
The part about needing $187,500 invested in the fund can seem unrealistic. People who have been investing for years may already have that in their brokerage account. But those just starting out probably have nowhere near that much to work with.
The Schwab U.S. Dividend Equity ETF’s goal is long-term growth of capital and income. Your portfolio should be built with a similar mindset.
Investing on a consistent monthly basis (even through market downturns) is the best way to accumulate long-term wealth. Make sure you capture 401(k) matching contributions. Reinvest dividends to purchase additional shares. All of these little things you do can help grow your portfolio significantly if you keep doing them for years and years.
Building a portfolio large enough to generate $500 a month in dividends won’t happen overnight. But investors willing to think in terms of decades could eventually turn this fund into a passive income-generating machine.
