The Schwab U.S. Dividend Equity ETF ($SCHD) has demonstrated impressive growth in its dividend payouts over the decade, rising from $0.35 per share in 2014 to $0.99 in 2024. If this growth rate persists, projections suggest a dividend of $2.80 per share by 2034. With shares currently trading at $28, this growth highlights the power of compounding dividends, where reinvesting dividends can lead to significant wealth accumulation over time, much like a snowball gaining size as it rolls downhill.
However, while the allure of this growth is compelling, it’s crucial to acknowledge the potential risks involved. One significant risk is market volatility; even though $SCHD focuses on stable, dividend-paying companies, broader market downturns can affect its value. If there’s a significant economic downturn or sector-specific issues affecting the companies within the ETF, the share price could decline, impacting the total return on your investment.
Another risk is the dividend sustainability. While past performance suggests growth, there’s no guarantee that companies will continue to increase dividends at the same rate or at all. Economic conditions, company performance, or changes in corporate policy could lead to dividend cuts or slower growth, altering the projected $2.80 by 2034.
Interest rate changes also pose a risk. Rising interest rates can make fixed-income investments more attractive compared to dividend stocks, potentially leading to a shift in investor preference away from dividend ETFs like $SCHD, which could affect its price.
Inflation is another factor to consider. While dividends can help combat inflation over time, high inflation rates could erode the purchasing power of those dividends if they don’t grow at a pace that outstrips inflation.
Lastly, there’s the concentration risk. $SCHD, like many ETFs, might have a concentration in certain sectors or stocks. If those sectors underperform or if there’s a significant event impacting a major holding, it could disproportionately affect the ETF’s performance.
Despite these risks, the strategy of investing in $SCHD for dividend growth remains appealing for those with a long-term perspective, provided they are aware of these potential pitfalls. It’s about balancing the excitement of watching your investment grow with a clear understanding of the economic environment and the inherent risks of the market. Let the snowball roll, but keep an eye on the path it’s taking.