Want Decades of Passive Income? Buy This ETF and Hold It Forever.

While the Schwab U.S. Dividend Equity ETF (SCHD) offers a high yield, its recent underperformance against the S&P 500 and lack of tech exposure make it less ideal for long-term investors seeking balanced returns. The iShares Core Dividend Growth ETF (DGRO) is presented as the superior 'buy-and-hold forever' option, tracking companies with consistent dividend growth and sustainable payout ratios. DGRO's methodology, which includes diverse holdings like Apple and Microsoft, has enabled its quarterly per-share payment to nearly triple over the past decade, offering a robust blend of income and capital appreciation despite a lower initial yield.

Analysis

The Schwab U.S. Dividend Equity ETF (SCHD), despite its attractive trailing yield of 3.9%, has significantly underperformed the S&P 500 and other major dividend funds since 2023. This underperformance is primarily attributed to its underlying Dow Jones U.S. Dividend 100 index's limited exposure to technology stocks, which have benefited from the artificial intelligence megatrend. Its relative weakness shows no clear signs of abating, making its overall performance subpar.

In contrast, the iShares Core Dividend Growth ETF (DGRO) is highlighted as a superior long-term "buy-and-hold" option, despite its smaller asset base ($35 billion) and lower initial yield (under 2.2%). DGRO tracks the Morningstar US Dividend Growth Index, which mandates at least five consecutive years of dividend increases and excludes companies with unusually high yields or payout ratios exceeding 75% of earnings. This methodology prioritizes sustainable dividend growth over high immediate yield.

DGRO's portfolio is diversified, with top holdings including Johnson & Johnson, Apple, JPMorgan Chase, Microsoft, and ExxonMobil, and positions weighted by dividend payments, capped at 3% per holding. This balanced approach has enabled its quarterly per-share payment to nearly triple over the past decade, delivering both reliable income and capital appreciation. The fund offers a compelling balance of growth and income, a trade-off many long-term investors find acceptable.

Key Decisions for Investors

• Investors currently holding or considering high-yield dividend ETFs like SCHD should scrutinize their long-term growth prospects, particularly their sector exposure and ability to keep pace with broader market trends.
• For long-term, income-oriented portfolios seeking a blend of sustainable dividend growth and capital appreciation, DGRO presents a compelling alternative due to its robust selection methodology and proven track record of increasing payouts.
• When evaluating dividend funds, prioritize metrics like dividend growth history, payout ratios, and underlying company fundamentals over merely the highest current yield, as these factors contribute to long-term total return and inflation protection.