Ask anyone how an extra $1,000 a month with no extra effort sounds, and I’d imagine they’d say it sounds great. The more passive income, the better, and in the stock market, this is typically in the form of dividends. Once you buy shares of a dividend-paying stock or ETF, you get rewarded for simply holding it.
The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is one of the premier dividend ETFs on the market. It’s known for holding quality companies and offering one of the higher yields from dividend ETFs. If your goal is an extra $1,000 each month in dividend income, SCHD can for sure make it happen. But at what cost?
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How $1,000 monthly is possible
To reach $1,000 monthly, you’ll need to earn $12,000 annually from SCHD (it pays out quarterly), so we’ll use that for our calculation.
At the time of writing, SCHD is trading at $34.21, with a trailing dividend yield of 3.08%. That’s lower than the 3.43% yield it has averaged over the past five years, but investors shouldn’t mind, with the stock up over 24% this year.
Here are three scenarios showing how much you’d need invested in SCHD to generate $12,000 in annual income. One uses the current yield, one uses the five-year average yield, and one uses a hypothetical in between.
Table by author. Investment based on a $34.21 share price.
Based on today’s yield and share price, you need to invest nearly $390,000 in SCHD to reach $12,000. The exact amount will vary as share price and payouts change, but either way, it’s a lump sum that’s unrealistic for most investors.
Slowly but surely
The key to getting to $390,000 is reinvesting your dividends and taking advantage of compound earnings.
Most brokerage platforms offer dividend reinvestment plans (DRIPs) that automatically reinvest dividends you receive into the stock or ETF that paid them. It’s a compounding cheat code: The new shares you buy with the payout start generating dividends of their own, snowballing over time.
A cash payout is nice, but it’s often better reinvested until you own enough shares to generate meaningful payouts.
Another factor working in investors’ favor is SCHD’s criterion of holding only stocks committed to increasing their annual dividend payouts. In the past decade alone, SCHD has doubled its quarterly payout. Its payouts will always fluctuate because different stocks pay dividends at different times, but you can bet the overall trajectory of its payouts will be up over time.
