Most of Social Security's beneficiaries are happy to collect their monthly checks, but the program isn't providing all of the income a typical retiree needs. The average payment currently stands at a modest $1,976 per month, so a retiree needs their own savings to cover the rest of their ongoing living expenses.
The question is, how? How should someone's retirement savings be turned into reliable passive income? Interest-bearing bonds are an obvious option, but for many people, dividend-paying stocks are at least an equally important part of the mix.
Enter the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD), a compelling investment that anyone looking to supplement their monthly Social Security benefits may want to consider.
Here's what you need to know about this exchange-traded fund.
First off, the ETF's trailing-12-month dividend yield of just under 4% is measurably better than what you'll get from an S&P 500 index fund and many other dividend-focused funds. A $100,000 position would net you about $4,000 worth of dividends per year right now.
However, it's also appealing due to the index it tracks. The underlying Dow Jones U.S. Dividend 100 Index screens for 100 high-quality dividend stocks (excluding REITs) with a baseline requirement of 10 consecutive years of payouts. Index constituents also have the highest composite scores based on their return on equity, dividend yield, five-year dividend growth rate, and free cash flow relative to total debt.
Its top holdings include Texas Instruments, Chevron, ConocoPhillips, Merck, and PepsiCo, just to name a few. In addition to the high dividend yield, the ETF can also be seen as a value play as its average price-to-earnings ratio is just 16 times trailing earnings. That's well below the S&P 500‘s trailing P/E ratio of 25.
Though the strict screening criteria contribute to the ETF's high yield and rising payouts, the fund has underperformed the S&P 500 over the past decade.
The gap has widened since the beginning of 2024 as recent market trends — namely the rise of artificial intelligence (AI) — disfavor the ETF's holdings.
