Want $500 a Month in Passive Income? Start With This Brilliant Dividend ETF.
Key Points
The Schwab U.S. Dividend Equity ETF (SCHD) is one of the best funds for generating dividend income from high-quality stocks.
It has a long history of adding income, growth, and quality to a broader portfolio.
Here's the road map for getting the fund to produce $500 a month in income.
Generating $500 per month in passive income would be a huge step toward using your portfolio to actually fund your lifestyle. No longer would the focus be exclusively on long-term growth. It could be built for generating the income to pay your bills today.
Of course, there are a number of ways to go about doing that. Targeting something with an 8% to 10% yield might sound tempting, but those are often risky or unstable dividends. The better strategy is to identify an ETF with a larger portfolio of high-quality stocks that still produce sustainable above-average yields.
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My personal favorite for this is the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). Since its 2011 inception, it's increased its annual dividend every year. And its 3.2% yield is triple the yield on the S&P 500.
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How much it takes for SCHD to generate $500 per month in income
Producing $500 in dividend income monthly from the Schwab U.S. Dividend Equity ETF means generating $6,000 per year. At its current yield of 3.2%, that would require an investment of $187,500.
I'd point out that this fund actually distributes dividend quarterly, not monthly, and expectations should be adjusted accordingly. Also, its yield and distribution amounts can fluctuate regularly.
But the reason why the Schwab U.S. Dividend Equity ETF works so well for this is its structure is that it focuses entirely on high-quality dividend-paying stocks with above-average yields. It's not overly concentrated, and its multipronged strategy helps eliminate excessive risks from making their way into the portfolio.
This strategy looks for sustainable income and consistent long-term growth, not eye-popping yields or risky investments.
SCHD helps build growth and income
Even if you don't have $187,500 to invest today, the Schwab U.S. Dividend Equity ETF can help get you there.
It's more than just a dividend producer, as evidenced by its long-term returns. Since its inception, the fund has returned 13.4% annually (with dividends reinvested). That includes a 29% year-to-date total return as investors continue rotating into the value and quality stocks that make up this portfolio.
If investors maintain a long-term buy-and-hold perspective and regularly reinvest their dividends into additional new shares, even modest initial investments can grow substantially over the course of years. If you add regular monthly investments to it, even better!
But for investors looking to build toward a $500-per-month, sustainable passive income stream, the Schwab U.S. Dividend Equity ETF's combination of income, growth, and quality is exactly what they need.
David Dierking has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.