(Source : Yahoo News)
Buying dividend stocks is an excellent way to make passive income. However, with so many companies paying dividends, it can be hard to know where to start.
The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) makes it easy. The exchange-traded fund (ETF) lets you invest in 100 of the top dividend stocks through one easy-to-buy package. And it charges an ultra-low expense ratio, which lets investors keep more of the dividend income these stocks produce without giving too much back in fees.
A who’s who of dividend stocks
The Schwab U.S. Dividend Equity ETF aims to track the Dow Jones U.S. Dividend 100 Index. That index measures the performance of higher-yielding dividend stocks with a record of consistency and strong financial metrics compared to their peers. These features enable the companies to steadily increase their above-average payouts.
That’s clear from looking at a couple of the fund’s top holdings. Home Depot (NYSE: HD) currently sits at the top of the list with a 4.3% allocation. The home improvement retail giant has a dividend yield above 2% at Friday’s prices, comfortably higher than the S&P 500 (less than 1.5%). Home Depot has an excellent record of paying dividends. It has increased its payout for 15 straight years, including by 7.7% in February. The company backs its payout up with a strong financial profile. It generated nearly $11 billion in net cash from operating activities in the first half of this year, easily covering its roughly $4.5 billion dividend outlay. With its cash flow, balance sheet, and long-term fundamentals strong, Home Depot should have no trouble continuing to pay dividends.
Verizon (NYSE: VZ) is the fund’s second-largest holding, at 4.25% of its assets. The telecom titan currently offers a dividend yield above 6%. It recently delivered its 18th consecutive annual dividend increase, the longest current streak in the U.S. telecom sector. Verizon produces lots of cash ($16.6 billion of cash flow from operations in the first half of this year), which covered its capital expenditures ($8.1 billion) and dividend payments ($5.6 billion) with room to spare. Verizon uses its excess free cash to strengthen its already solid balance sheet, which is giving it the financial fortitude to buy Frontier Communications in a $20 billion all-cash deal to drive future growth.
A high yield for a low price
Home Depot and Verizon are two of the 100 dividend stocks held by the fund. Most of its holdings offer high dividend yields. Because of that, the fund itself has a high yield. Over the past year, the fund’s yield is 3.3% based on its distribution payments.
Those payments ebb and flow each quarter based on the dividend payments received by the fund. However, they’ve trended higher over the years:
Driving that growth is the fund’s focus on holding stocks that regularly increase their dividends. Many of its top holdings have delivered a decade or more of annual dividend increases. Given the fund’s preference for companies with leading financial profiles, these companies should be able to continue increasing their payouts.
Fund investors get that rising income stream for a very low price. The ETF has a 0.06% expense ratio. For comparison, some other top dividend ETFs have expense ratios between 0.28% and 0.35%. Put another way, a $1,000 investment in Schwab U.S. Dividend Equity ETF would cost a mere $0.60 each year in fees, while higher-cost funds would incur $2.80 to $3.50 in annual management fees for every $1,000 invested.
A great way to collect dividend income
Investing in dividend stocks is an excellent way to make passive income. You could hand-select a portfolio of top dividend stocks or go the easy route and get 100 of them in one single fund through the Schwab U.S. Dividend Equity ETF. The ETF charges a low rate, which enables investors to keep more of the high-yielding dividend income its holdings generate. These features make it a top option for those seeking to collect dividend income.
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Matt DiLallo has positions in Home Depot and Verizon Communications. The Motley Fool has positions in and recommends Home Depot. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
Want to Collect Passive Income? This High-Yielding ETF Gives You 100 Top Dividend Stocks for 1 Low Price. was originally published by The Motley Fool