The cliche about life being short seems to come woefully short of proper expression.

When you take away childhood (no agency), old age (fragility), sleep, and time spent working, the amount of utilizable hours available for many people is shockingly small.

This is precisely why achieving financial freedom as soon as possible in life so vital.

When you have financial freedom, you’re able to claim back many hours for yourself and live life on your terms.

And when it comes to achieving financial freedom effectively, I’d argue strongly for implementing dividend growth investing.

This is a long-term investment strategy which involves buying and holding shares in high-quality businesses paying reliable, rising dividends to shareholders.

You can find hundreds of examples over at the Dividend Champions, Contenders, and Challengers list.

This list has invaluable information on US-listed stocks that have raised dividends each year for at least the last five consecutive years.

These are some of the best businesses in the world, as it takes a certain degree of excellence in order to consistently generate the rising profits necessary to sustain rising dividends.

I’ve used this strategy for the past 15+ years myself.

It’s helped me to build the FIRE Fund.

That’s my real-money portfolio producing enough five-figure passive dividend income for me to live off of.

That income, in turn, allowed me to become financially free and retired in my early 30s.

While investing in the right businesses is key to long-term investment success, there’s also the matter of investing at the right valuations.

Whereas price represents what you pay, value represents what you get.

An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.

This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.

Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.

That higher yield correlates to greater long-term total return potential.

This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.

Prospective investment income is boosted by the higher yield.

But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.

And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.

These dynamics should reduce risk.

Undervaluation introduces a margin of safety.

This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.

It’s protection against the possible downside.

Achieving financial freedom by routinely buying undervalued high-quality dividend growth stocks is one of the very best defenses we have against life being so short.

Everything just noted above about valuation may seem complex, but it’s really not.

Lesson 11: Valuation, written by fellow contributor Dave Van Knapp, demystifies the whole concept and even provides a template you can use on your own.

With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…

The Charles Schwab Corporation (SCHW)

The Charles Schwab Corporation (SCHW) is an American multinational financial services company.

Founded in 1971, Charles Schwab is now a $167 billion (by market cap) financial services powerhouse employing over 33,000 people.

The company reports results across two segments: Investor Services, 79% of FY 2025 revenue; and Advisor Services, 21%.

Charles Schwab is largely known for its retail investment brokerage platform.

It’s the largest self-directed brokerage in the US, controlling nearly 40 million active brokerage accounts.

As of the end of 2025, Charles Schwab manages just under $12 trillion in client assets across its brokerage, banking, asset management, custody, financial advisory, and wealth management divisions.

The company is able to make money from fees, spreads, and the float capabilities of its massive AUM base.

And these avenues have built-in structural tailwinds.

First, Charles Schwab is able to gather AUM from scale begetting scale (driving core net new asset growth of 42% in 2025).

Second, its AUM base is incredibly “sticky” (as a customer myself, I can attest to the lack of desire to switch over to a new firm), meaning new assets deliver growth rather than simply counteract turnover.

Third, its AUM base is akin to a very large boat located in a tide lifting all boats, as the compounding nature of global corporate expansion causes global asset prices and values to grow exponentially over time (thereby organically and internally moving AUM higher).

It’s almost an unstoppable juggernaut at this point, leading to Charles Schwab steadily increasing its revenue, profit, and dividend.

Dividend Growth, Growth Rate, Payout Ratio and Yield

Charles Schwab is on pace for two consecutive years of dividend increases.

I tend to limit my write-ups to only those firms with five or more consecutive years of dividend increases, but I think Charles Schwab is worth making a rare exception for.

It’s not that the company doesn’t routinely increase its dividend; rather, it’s just that the dividend raises come in spurts, followed by static payouts, followed by aggressive hikes again.

It’s not the typical calendar year cadence that most dividend growth stocks have.

Still, if we go from point to point over the last decade, the dividend has quadrupled.

Putting aside the cadence for a moment, the dividend has actually compounded at an annual rate of 16.7% over the last decade.

That’s excellent overall dividend growth, even if not completely uniform.

Along with that mid-teens dividend growth, the stock yields 1.3%.

The combination of yield and growth is nearly 20%, so it’s an excellent pairing for those who appreciate the power of long-term compounding over the immediate gratification of high yield.

This yield, by the way, is 10 basis points higher than its five-year average, so there is slightly more yield to be had here than usual.

With a payout ratio of 23.3%, Charles Schwab has plenty of support under the dividend and is positioned to continue aggressively growing it over time.

Again, for those who have the time to let a great business compound, Charles Schwab is a fascinating idea.

Revenue and Earnings Growth

As fascinating as it may be, though, much of that is based on past information.

However, investors must constantly be anticipating future information, as the capital of today is put on the line and risked for tomorrow’s rewards.

Thus, I’ll now build out a forward-looking growth trajectory for the business, which will come in handy when the time comes to estimate fair value.

I’ll first show you what the business has done over the last ten years in terms of its top-line and bottom-line growth.

I’ll then reveal a professional prognostication for near-term profit growth.

Amalgamating the proven past with a future forecast in this way should equip us with the ability to roughly judge where the business could be going from here.

Charles Schwab moved its revenue from $7.5 billion in FY 2016 to $23.9 billion in FY 2025.

That’s a compound annual growth rate of 13.7%.

Excellent top-line growth out of this business.

However, it’s not been totally organic.

Charles Schwab made a deal in 2020 to acquire TD Ameritrade, a large brokerage firm at that time, for $26 billion.

This all-stock acquisition boosted revenue significantly, but it caused dilution.

Meanwhile, earnings per share rose from $1.31 to $4.65 over this period, which is a CAGR of 15.1%.

I’d note that more recent quarters have shown YOY EPS growth well in excess of 20%.

It’s fantastic stuff, showing that dilution didn’t slow the firm down; to the contrary, there’s clearly been accretive and accelerating bottom-line growth.

We can also see that mid-teens dividend growth has been fueled by like EPS growth.

Charles Schwab is basically compounding the business aggressively… and rewarding shareholders in kind.

Looking forward, CFRA believes that Charles Schwab will deliver 20%+ EPS growth over the near term.

CFRA’s operating EPS forecast for 2027 is $7.40, which is a meaningful jump from where things finished at in 2025.

CFRA sees a substantial opportunity for Charles Schwab to expand, despite already being the largest self-directed brokerage in the US.

This is, again, a case where scale begets scale, with CFRA noting the self-reinforcing leadership in an industry where scale, trust, and capabilities are critical considerations for customers.

If a switch to a competitor would involve cumbersome asset transfers and less scale at the new platform, why make the move at all?

With investing democratization playing out amidst one of the greatest generational transfers of wealth in history, Charles Schwab is poised to take the firm to new heights.

Also, market volatility is not really a problem for Charles Schwab; if anything, increased volatility only means more activity and chances to earn on spreads.

I’m inclined to agree with CFRA’s assessment, which means the dividend is likely to continue growing at a healthy, double-digit pace for years to come (albeit not necessarily in a strict fashion every four quarters on the dot).

Financial Position

Moving over to the balance sheet, Charles Schwab has a great financial position.

Now, while it’s hard to get a good read on the balance sheet because of the company’s structure and exposure to banking, a long-term debt/equity ratio of 0.4 indicates strength.

Moreover, S&P has awarded Charles Schwab with a very strong, investment-grade credit rating of A- on senior unsecured debt.

I’d also quickly note that the firm’s founder, Charles Schwab himself, remains one of the company’s largest shareholders and is actively involved in the company via his role as Co-Chairman.

The founder undoubtedly wants to see the firm continue to thrive and avoid any kind of major financial risks that would threaten that.

Profitability is outstanding.

Return on equity has averaged 17.9% over the last five years, while net margin has averaged 33.5%.

Charles Schwab is generating very high returns on capital and fat margins, providing further evidence of its excellence.

As someone who’s looked at thousands of businesses over the years, it seems to me that Charles Schwab is in a top tier.

And with economies of scale, “sticky” assets, switching costs, and brand trust, the company does benefit from durable competitive advantages.

Of course, there are risks to consider.

Litigation, regulation, and competition are omnipresent risks in every industry.

While its industry is competitive, Charles Schwab’s clear leadership and massive scale insulate it somewhat.

Regulatory threats occur on two fronts, via both banking and brokerage operations.

The company has interest rate sensitivity, as rates affect net interest income.

Any major economic slowdown would likely negatively affect Charles Schwab, as asset prices would fall, asset gathering would likely stall, and trading activity may drop.

Charles Schwab has to be mindful of its client cash sorting activities.

The company has exposure to exchange rates and geopolitics.

While there are certainly some risks to consider, I view the quality and growth that the business exudes to be even more considerable.

And with the valuation being where it’s at, I also think the valuation is very much worth considering…

Valuation

The stock is trading hands for a P/E ratio of just 17.6.

That compares very favorably to its own five-year average of 22.8.

This would put the PEG ratio at about 1, which is quite low and seemingly not fully acknowledging what this business is doing and capable of doing.

And the yield, as noted earlier, is higher than its own recent historical average.

So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?

I valued shares using a two-stage dividend discount model analysis.

I factored in a 10% discount rate, a 10-year dividend growth rate of 16%, and a long-term dividend growth rate of 8%.

I’m extrapolating out the overall dividend growth over the last decade into the next decade.

Based on scale, momentum, the low payout ratio, and the near-term forecast for EPS growth, I don’t see anything unreasonable about assuming a continuation of the status quo.

From there, however, I’d assume a natural slowdown as the business matures.

The DDM analysis gives me a fair value of $134.90.

The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.

The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.

It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.

I find it to be a fairly accurate way to value dividend growth stocks.

My viewpoint is that this is unusually attractive right now.

But we’ll now compare that valuation with where two professional stock analysis firms have come out at.

This adds balance, depth, and perspective to our conclusion.

Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.

1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.

Morningstar rates SCHW as a 4-star stock, with a fair value estimate of $124.00.

CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.

They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.

CFRA rates SCHW as a 5-star “STRONG BUY”, with a 12-month target price of $125.00.

I came out a smidge high, but we’re all in general agreement. Averaging the three numbers out gives us a final valuation of $127.97, which would indicate the stock is possibly 24% undervalued.

Bottom line: The Charles Schwab Corporation (SCHW) is an industry-leading powerhouse, sporting superb fundamentals, excellent positioning, and clear opportunities ahead. With a market-beating yield, double-digit dividend growth, a low payout ratio, nearly two consecutive years of dividend increases, and the potential that shares are 24% undervalued, this is one of my best ideas in financials for long-term dividend growth investors who have a long time horizon and appreciate the power of compounding.

-Jason Fieber

Note from D&I: How safe is SCHW‘s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 80. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, SCHW’s dividend appears Safe with an unlikely risk of being cut. Learn more about Dividend Safety Scores here.

P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.

Disclosure: I’m long SCHW.