My Dividend Growth Portfolio (DGP) is a real-time, real-money demonstration of dividend-growth investing. The portfolio is now in its 14th year, having been started in 2008.
Earlier this year, I put an ETF into the portfolio for the first time. For more than 13 years, the only investments in the DGP had been individual stocks.
But in July, I started a position in Schwab’s U.S. Dividend Equity ETF (SCHD). I added to that position in August via a dividend reinvestment.
After that second purchase, here’s what my position in SCHD looked like:
You can see the two purchases (on the lower two lines), their total value ($1458 on the top line) and SCHD’s total portion of my portfolio (0.89%).
Later on in this article, I’ll show the same display with more SCHD shares added, because I decided to make SCHD my dividend reinvestment for October, 2021.
I believe that you can follow a reasonable dividend-growth strategy via ETFs.
An ETF is a fund of companies rather than an individual company, kind of like a ready-made portfolio. Certainly, an ETF can comprise part of a dividend-growth portfolio. That’s the role it plays for me.
I researched dividend ETFs in May (Dividend Growth Stock of the Month for May 2021 — SPECIAL EDITION (SCHD), held a “derby” among them, and selected SCHD as the winner of the derby. I thought that SCHD stood a little above the others.
Here is a nutshell look at SCHD:
Here are the things I like about SCHD.
- It has never cut its dividend on an annual basis. Like all ETFs, its quarterly payments vary, but when you add them up to get full-year totals, each year has been an increase over the prior year.
- It has a 10-year streak of raising its total dividend payout every year. I know of no ETF that has a longer streak.
- It has a decent yield of 2.9%. That’s a backward-looking yield; ETF yields can’t be projected forward because of the variable quarterly payments, so the convention is to look back at the trailing 12 months, then divide by today’s price. The upshot is that SCHD’s true forward yield is probably a little higher, because we expect its dividend to be growing.
- SCHD sports a fast dividend growth rate of 12% per year over the past five complete calendar years (ending in 2020). In 2020 itself, SCHD raised its payout by 18%. We won’t know the number for 2021 until SCHD announces its final payment in December.
- It has one of the lowest expense ratios in the industry, at 0.06%.
Honestly, there’s really nothing that I don’t like about SCHD.
SCHD holds 100 stocks, which are rebalanced quarterly and reconstituted annually. Its top-10 holdings make up 40% of its assets, and they read like a wish-list of quality, high-performing dividend-growth stocks.
I hold some of those stocks as individual positions in my portfolio, while others I do not have. That makes SCHD a fine diversifier for me.
Here is what I mean by SCHD paying a variable dividend:
That variation from quarter to quarter illustrates why we can’t just multiply the most recent quarterly payout by 4 to use as “annual payout” in the yield calculation. The upward trajectory of the dividend, however, is apparent even through the noise of the quarterly zigs and zags.
When you add the quarterly payments up by year, SCHD’s unbroken streak of annual dividend increases becomes obvious.
(Source: Simply Safe Dividends)
I find SCHD’s valuation to be acceptable. It is hard to pin down a fair price for an ETF, but I took a crack at it in my original article that led me to SCHD. I have updated that estimate here:
At a current price of nearly $77 as I write this, my conclusion is that SCHD is near the high end of its fair-value range at the moment. By the way, I think it is easier to view the valuation in terms of the yield instead of the price. In other words, I would say that any yield of 2.9% or above would indicate a fair deal on SCHD.
Again, as with the yield calculation, the dividend run-rate is computed from the trailing 12 months of dividends paid. So the future projection would probably be higher than $13.38, but that’s the best estimate we can make with an ETF that pays variable dividends each quarter. It’s a conservative estimate.
Here’s SCHD’s position in the portfolio with the new shares added:
Today’s purchase is circled. The addition of 6 shares brings SCHD up to a 1.2% position size. My intent is to keep adding to it when I can get it at a fair price.
Impact on My Portfolio
Here is the impact on my portfolio’s income
The additional $13 in annual income represents a 0.2% increase. That is not quite enough to move the needle on the portfolio’s yield on cost, but it is a small step forward.
As this table shows, these small regular increments add up. This is the updated chart of my income reinvestment activities this year, with this month’s purchase highlighted in yellow:
As highlighted in green at the bottom, the dividend reinvestments by themselves have added 3.5% to my annual dividend run-rate, with two more months still to go. That’s an illustration of month-to-month compounding in action.
When I started this portfolio in 2008, I had no thoughts of including ETFs.
“Dividend” ETFs barely existed then. But times change, ETFs are now a major force in the market, and dividend ETFs have proliferated. There a bunch to choose from. My studies suggest that for the payment of a slight fee, some of them are ideal to help execute a dividend-growth strategy.
Since they run on automatic, that can be important when you consider that a time may come when you can no longer manage your portfolio and you need it to run kind of on its own. For that reason, my wife and I own quite a bit of SCHD in our personal investments.
SCHD is not the highest-yielding dividend ETF, but its combination of quality, unbroken dividend growth streak, and consistent performance across many market conditions in the past 10 years makes it very attractive as a basic dividend-growth holding.
This is not a recommendation to buy, hold, sell, trim, or add to SCHD. Any investment requires your own due diligence. Always be sure to match your stock and fund picks to your personal financial goals.
— Dave Van Knapp
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