The Enduring Strength of Dividend Growth Stocks

Dividend stocks have historically demonstrated stronger returns compared to non-dividend paying stocks, outperforming them by more than two-to-one over the past 50 years. This strong performance is notably exemplified by the Schwab U.S. Dividend Equity ETF (SCHD).

SCHD: Performance and Strategy

Since its inception in October 2011, SCHD has achieved an impressive 12.9% annualized return. The ETF's strategy focuses on tracking the Dow Jones U.S. Dividend 100 Index, which is composed of 100 high-yield dividend stocks.

Companies are meticulously selected based on four key dividend quality characteristics, including their dividend yield and a robust five-year dividend growth rate. A strong emphasis on dividend growth is a key component of this strategy, aiming to capture companies with sustainable and increasing payouts.

The Power of Dividend Growth

Historical data consistently highlights a powerful trend: companies that consistently increase their dividends tend to deliver superior long-term returns. The varying performance across different dividend policies illustrates this clearly:

• Dividend growers & initiators: 10.2% average annual total returns
• Dividend payers (no growth): 9.2% average annual total returns
• No change in dividend policy: 6.8% average annual total returns
• Equal-weighted S&P 500 index: 7.7% average annual total returns
• Dividend non-payers: 4.3% average annual total returns
• Dividend cutters & eliminators: -0.9% average annual total returns

This improved performance from dividend growers is attributed to the combination of increasing income and earnings growth, which contributes to both a rising base return from dividends and consistent share price appreciation.

SCHD's Holdings and Comparison

As of its last annual reconstitution in March, SCHD's 100 holdings presented an attractive average dividend yield of 3.8% and an 8.4% annualized dividend growth rate. This stands in stark contrast to the broader market, with the S&P 500 currently offering a 1.2% yield and a 5% compound annual dividend growth over the last five years.

Case Study: Coca-Cola and PepsiCo

Prominent holdings within SCHD include well-known consumer staples giants like Coca-Cola (KO) and PepsiCo (PEP), each representing a 4% allocation. Both companies are celebrated for their remarkable track records of consistent dividend growth; Coca-Cola has increased its dividend for 64 consecutive years, and PepsiCo for 54 consecutive years.

These long-standing dividend growers have also delivered compelling total returns for investors. Coca-Cola has achieved annualized total returns of 10.6% since 1990, while PepsiCo has delivered 10.4% annually since 1990. Both beverage companies maintain long-term targets for organic revenue and earnings-per-share growth, underpinning their capacity for continued dividend increases and sustained stock appreciation.

The Schwab U.S. Dividend Equity ETF's investment approach, centered on high-yielding dividend growth stocks, has clearly demonstrated effective and compelling performance.