The Best Dividend ETF to Buy and Hold Through Every Market Cycle for the Next 30 Years
Key Points
Over long periods, buy-and-hold is usually the best strategy to maximize returns.
Dividend ETFs can provide important quality, income, and defensive characteristics.
Here's the dividend ETF that I would choose to hold for the next 30 years.
If you're going to hold on to an investment for 30 years, pretty much the best thing you can do is invest your money and forget about it. Just let the long-term power of compounding do its thing. It's the best way to build wealth and avoid the potential damage you could do by trying to beat the market.
Dividend ETFs are generally well-built for this kind of goal. They're usually composed of high-quality companies with strong balance sheets and businesses that are durable across many economic environments. Sure, they may not be as exciting as tech or growth ETFs. But they can still deliver healthy long-term returns while experiencing less volatility in the process.
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Over the past 30 years, the one dividend ETF I'd trust most is the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD).
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SCHD's biggest advantage is its selection strategy
The Schwab U.S. Dividend Equity ETF currently yields around 3.3%, which is roughly triple that of the S&P 500. When choosing a dividend ETF, many people look at the yield first. In this case, however, the high yield is simply a by-product of an overall well-constructed portfolio strategy.
This fund tracks the Dow Jones U.S. Dividend 100 index. It starts with a universe of stocks that have paid dividends for at least 10 straight years. From there, it selects stocks using four fundamental measures: dividend yield, five-year dividend growth rate, return on equity (ROE), and free cash flow relative to debt. The best combinations of these factors ultimately make the final portfolio.
That makes the Schwab U.S. Dividend Equity ETF much more than just a high-yield ETF. It's one of the few funds that uses dividend quality, dividend growth, and yield together as selection criteria. And it's what makes this fund one of the best for long-term growth.
How to use SCHD in your portfolio now
Since its inception nearly 15 years ago, the Schwab U.S. Dividend Equity ETF has returned 13.2% annually. That's no guarantee the fund will deliver that kind of return over the next 30 years, but it has delivered impressive returns through multiple bear markets and challenging environments.
I wouldn't necessarily sell a position, for example, in the Vanguard S&P 500 ETF or the Vanguard Total Stock Market ETF to invest in this fund instead. But shifting from a more aggressive recent leader, such as the Vanguard Growth ETF or the VanEck Semiconductor ETF, into this fund might make more sense.
Many portfolios are still top-heavy in growth and tech stocks. Shifting more defensively to a high-quality dividend ETF could help mitigate risk while emphasizing quality in a long-term asset allocation.
David Dierking has positions in Schwab U.S. Dividend Equity ETF and Vanguard Morningstar Total Stock Market ETF. The Motley Fool has positions in and recommends Vanguard Morningstar Growth ETF and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.