Is the Schwab US Dividend Equity ETF a maker of millions?

Everyone wants to get rich from growth tech stocks. While others play checkers, consider playing chess with this dividend ETF.

Virtually every investor wants to build wealth, but there are countless roads to that destination. When talking about potential millionaire-making investments, it often comes down to how likely they are to get you where you want to go and how long it will take.

Naturally, individual stocks generally represent a successful investment. On the other hand, exchange-traded funds (ETFs) are usually about the underlying strategy because they represent many stocks (sometimes hundreds) grouped together and traded under a single ticker symbol.

The Schwab US Dividend Equity ETF (SCHD 0.33%) is a popular dividend stock ETF. However, investors often question whether this sector offers enough growth and potential for long-term wealth-seeking investors. I researched the long-term potential of the ETF and how investors can best maximize it.

Here's what you need to know.

Here's what investing in the Schwab US Dividend Equity ETF can do for you

The Schwab US Dividend Equity ETF includes 103 dividend stocks, so purchasing one share of the ETF gives investors a piece of ownership in over a hundred companies. Therefore, investors are very diversified from the start. The fund tracks the Dow Jones US Dividend 100 Index.

At the current stock price, investors receive a distribution (dividend) yield of 3.3%, well above the S&P 500's 1.3%.

Now, let's talk strategy. The ETF features mature, blue-chip companies with a history of paying and increasing dividends. The Schwab US Dividend Equity ETF's top 10 holdings are:

Pfizer: 14 consecutive years of annual dividend increases BlackRock: 15 years AbbVie: 52 years (including as part of Abbott Labs) Cisco Systems: 14 years Coca-Cola: 62 years Bristol Myers Squibb: 18 years Texas Instruments : 21 years PepsiCo: 52 years Lockheed Martin: 22 years Amgen: 13 years

People focus on dividends as profits that a company could have retained and reinvested but instead returned to shareholders. This is technically true, and it is also true that these mature companies are not among the fastest growing companies in the market.

However, dividends also represent a litmus test. Only a quality, growing company can pay a dividend (a cash expense for the company) and increase it every year. Building substantial stock market wealth takes time in most cases, and high-quality dividend stocks provide consistency for what they lack in growth.

The Schwab US Dividend Equity ETF has generated a total return of almost 400% since the end of 2011. This makes the ETF a multibagger. This blue-chip dividend stock strategy can make investors rich when you give it enough time for compounding to work its magic.

ETF lags S&P 500, but there's more to tell

In my experience, the most common argument against the Schwab US Dividend Equity ETF is that it lags the S&P 500, so people would be better off just buying and holding an S&P 500 index fund.

I would never reject investing in the S&P 500, but it's not as strong an argument as it seems. If you look at the historical performance of the two below, you can see that they were pretty close until the last five years:

SCHD Total Return Price Data by YCharts

The S&P 500 has become increasingly weighted in technology (33%) due to the stocks of the “Magnificent Seven”, which currently represent 32% of its value. In other words, the S&P 500 isn't as diverse as its name suggests. One could argue that a slowdown in the tech sector would hurt the S&P 500 more than the Schwab US Dividend Equity ETF, which has only 8.8% exposure to tech.

Here's the bottom line: Don't let recency bias and the tech stock boom keep you from appreciating how effectively the Schwab US Dividend Equity ETF has generated wealth for investors over the past 14 years.

How to get the most out of the Schwab US Dividend Equity ETF

Do you want to invest in the Schwab US Dividend Equity ETF? Reinvest your dividends.

The companies in the ETF are generally growing, but they are not growth stocks. Reinvesting dividends means your dividends buy more ETF shares, which also pay dividends. This is an additional layer of capitalization that allows you to optimize your returns on investment.

You also create a dividend snowball that brings you more income as it grows. What's interesting is that you can potentially keep your dividends instead of reinvesting them, meaning you get cash flow from your investment without selling shares. Theoretically, your portfolio could earn you money forever, whereas someone who has to sell their stocks for cash could have problems if they sell too many or the market crashes.

After all, becoming a millionaire isn't just about labels, it's also about lifelong wealth.

Justin Pope holds positions at Coca-Cola and PepsiCo. The Motley Fool holds positions and recommends AbbVie, Abbott Laboratories, Bristol Myers Squibb, Cisco Systems, Pfizer and Texas Instruments. The Motley Fool recommends Amgen and Lockheed Martin. The Motley Fool has a disclosure policy.

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