You don’t have to start with a huge sum of money; you just have to keep saving hard month in and month out. That’s really the key to long-term investment success. A good example of this comes from some simple math around Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD), starting with just a $500 investment. But it is a decade of commitment that turns that modest investment into a $10,000 cash hoard.
Before getting into the math, it is important to understand what Schwab U.S. Dividend Equity ETF is all about. Dividend income is the quick answer, but how the exchange-traded fund (ETF) gets there is extremely important. The starting point is looking only at companies that have increased their dividends for a decade (eliminating real estate investment trusts, or REITs, which are designed to generate income and would likely sway the fund too heavily toward this asset class).
The next step is to create a composite score that, basically, tries to ferret out a company’s quality, growth, and income bonafides. The score includes cash flow to total debt, return on equity, dividend yield, and a company’s five-year dividend growth rate. The 100 companies with the highest composite scores get into the index and are weighted by market cap. Although you might personally look at other metrics, the big goal is likely the same as if you were building a portfolio stock by stock: Buy good companies that pay reliable dividends.
All that work is handled by Schwab U.S. Dividend Equity ETF for a tiny expense ratio of 0.06%. The dividend yield is roughly 3.5%. The ETF was created in late 2011 and has a long history of success behind it, leading to an annualized performance of a very attractive 12% since its inception. Buying this ETF will leave you the freedom to focus on regularly saving money, where you are likely to have the biggest impact on your own long-term financial success.
If you invested $500 in Schwab U.S. Dividend Equity ETF and held it for a decade with a 12% annualized return over that span, you would end up with roughly $1,550. That’s not a huge sum of money. But if you added $500 each year, you would end up with over $10,300.
You might argue that $500 a year over a decade is a lot more money. That’s true; you will have put in the original $500 and then added $5,000 on top of it. The rest of the gain, roughly $4,800, was driven by the total return in Schwab U.S. Dividend Equity ETF over time. That’s the power of compounding.
