Does your portfolio need reliable income for the foreseeable future? Or, maybe you’d just like to play a little defense against economic uncertainty? Whatever your need, dividend stocks are an obvious choice. The only problem is, shopping around for even just a small handful of new dividend-paying stocks could be a bit of a hassle.

Most investors would be just as well served by owning a single dividend exchange-traded fund (ETF) — and one stands out among several decent options right now.

Not all dividend ETFs are the same

Contrary to an easy-to-make assumption, not all dividend ETFs are the same. Indeed, they’re surprisingly different. Take the Vanguard High Dividend Yield ETF (VYM 0.55%) and the SPDR S&P Dividend ETF (SDY 0.13%) as an example.

The Vanguard fund is meant to mirror the performance of the FTSE® High Dividend Yield Index, while the SPDR fund is based on the similar S&P® High Yield Dividend Aristocrats Index. (The term Dividend Aristocrats® is a registered trademark of Standard & Poor’s Financial Services LLC.) And both sport yields of just under 2.6% right now. Over the course of the past five years, however, the Vanguard fund has performed about 40% better than SDY whether or not you factor in these funds’ respective dividends.

The Schwab U.S. Dividend Equity ETF (SCHD 0.49%) is similar in that its underlying Dow Jones U.S. Dividend 100 consists of dividend stocks that have no particular dividend-growth requirement, but are high-yielding names of good quality all the same. Its trailing yield stands at a markedly higher 3.9% in fact. But it’s lagged SDY as well as VYM for a while now, again with or without its dividends being counted in its performance.

SCHD Total Return Level data by YCharts

The best all-around performer for the past five years has actually been the Vanguard Dividend Appreciation ETF (VIG 0.56%), based on the S&P U.S. Dividend Growers Index. This index prioritizes consistent dividend growth, requiring a minimum of 10 years’ worth of rising annual payouts.

In fact, yields aren’t part of its selection methodology, other than to exclude the market’s highest-yielding names from this index. Why? Standard & Poor’s rightfully worries that high yields are often an indication of trouble for a company, reflected by that company’s stock’s poor performance. To this end, VIG’s trailing dividend yield currently stands at a mere 1.65%, lowered by the fund’s market-leading gains since 2023.

But the question remains, which of these exchange-traded funds would be the smartest dividend ETF to buy with a couple thousand bucks right now? It’s the Schwab U.S. Dividend Equity ETF. Here’s why.

The pick of the litter for what’s waiting on the horizon

Don’t panic if you already own one of the other three funds, or a different dividend ETF altogether. You’re hardly doomed. If you’ve got room and reason to add a new income investment to your portfolio at this time though, Schwab’s SCHD is a top choice. And not necessarily for the reason you might think.

Yes, its yield of nearly 4% is better than you’ll find with most other dividend stocks and ETFs. That’s not the crux of the bullish argument though. That’s just a side effect of this fund’s subpar performance since 2023. The Schwab U.S. Dividend Equity ETF is a top prospect right now because the big reason for its recent underperformance may be about to reverse. That’s a shift from an environment that favors growth stocks to one that favors value stocks, and dividend stocks in particular.

All four of these funds are more value funds than not, to be clear. Even among these four value-oriented funds though, SCHD is by far the most value-oriented. The average price-to-earnings ratio of its holdings is a mere 16.3, which is well under the P/E ratios of VYM, SDY, and VIG’s sky-high average earnings multiple of 25.5.

And this has mattered of late — a lot. Value stocks like the Schwab U.S. Dividend Equity ETF’s PepsiCo, Merck, Chevron, and Verizon Communications have struggled specifically because investors have been so enamored with growth for the past couple of years, at the expense of value stocks.

Many of the factors that favored growth names over value are starting to unravel though, chief among them being the waning euphoria surrounding artificial intelligence stocks. Investors still love them, but they’re at least starting to ask questions about profitability, and at least questioning outrageous valuations.

Meanwhile, economic lethargy, lingering inflation (especially as it relates to housing), and tepid job growth all work against growth, which works in favor of value stocks.

Then there’s the far bigger reason taking on new positions in dividend-paying value investments makes good sense at this time. That’s the possibility of a prolonged period of poor performance from the overall market.

Vanguard’s most recent long-term outlook puts things in alarming perspective, suggesting the U.S. stock market is only apt to see average annual growth of between 3.3% and 5.3% for the next 10 years, with growth stocks likely to see even weaker returns than that. Morningstar puts the figure at a slightly better 5.6%, aligning with brokerage firm Charles Schwab‘s expectation for an average yearly return of only 6% for the coming decade. But that’s still weak.

The underlying bearish arguments hold water though. Most of these troubling predictions cite inflation, trade uncertainties, and labor woes as reasons for the below-average returns, along with the unusually high valuations of most growth stocks right now. If these outlooks are anywhere close to being on target, cash dividends (and the stocks capable of paying them) will become very valuable indeed.

No rush, but don’t tarry either

Don’t read too much into the message too quickly. While we may see a shift from an environment that favors growth stocks to an environment that favors dividends and value stocks, it will likely be a gradual shift that plenty of tickers will be able to defy — at least, for a while. There’s no need to dump your entire portfolio here and go all-in on a single ETF, or even several different dividend-paying exchange-traded funds.

But, it also wouldn’t be crazy to start proactively moving your portfolio in this direction, even without knowing exactly when — or even if — this change is brewing. If you wait until it’s crystal clear that you should, you’ve arguably waited too long.

Many investors aspire to build a portfolio that can pay them enough in dividends to fund their retirement goals.

If you can find stocks that consistently raise their dividends, typically offsetting the impact of inflation and then some, you could find yourself in the enviable position where you can leave your principal investment untouched. Instead, you get to live off your dividends and pass along your stocks to your heirs or donate them to charity.

But building a portfolio of high-quality dividend stocks isn’t easy. Fortunately, there’s one exchange-traded fund (ETF) that can take care of it for you. And if you invest early and consistently until retirement, you could end up with a portfolio worth over $850,000 that pays out around $30,000 in annual dividends.

The best dividend ETF on the market

Two simple factors that can help investors find companies that are likely to raise their dividends in the future are management’s history of dividend increases and the company’s financial health. If management has consistently increased the dividend and has the financial ability to keep doing so, it’s very likely to continue the streak. That’s why the Schwab U.S. Dividend Equity ETF (SCHD 0.21%) is an effective way to invest in high-yield dividend growth stocks.

The index fund follows the Dow Jones U.S. Dividend 100 Index, which selects 100 stocks that have each increased their dividend annually for at least 10 consecutive years. It ranks each eligible company by several criteria: the ratio of free cash flow to debt, return on equity, dividend yield, and dividend growth rate. The top 100 companies (based on a composite ranking of all four criteria) are included in the index and weighted by market cap.

As of this writing, the 10 largest companies (and their dividend yields) in the index are as follows:

1. Coca-Cola (2.8%)
2. Verizon Communications (6.2%)
3. Altria (6.8%)
4. Cisco Systems (2.6%)
5. Lockheed Martin (2.8%)
6. ConocoPhillips (3.7%)
7. Home Depot (2.5%)
8. Chevron (5.1%)
9. Texas Instruments (3%)
10. Abbvie (3.6%)

As you can see, you get a mix of high-yield dividend stocks along with stocks that have strong growth supporting future payout increases. The result is a combined yield of about 4% based on trailing-12-month distributions from the ETF. But the forward yield should be even higher considering most constituents will pay out more over the next year than the previous year.

With an expense ratio of just 0.06%, the cost of investing in this ETF is low and in line with some of the most popular index funds on the market. The Dow Jones dividend index’s decision to weight constituents by market cap (with a 4% weight limit) makes it a very efficient index to track, and it lowers the risk tied to any high-yield stocks that aren’t as fundamentally sound as the screener suggests. If the market bids down the value of those stocks, they will comprise a lower percentage of the index over time, while the high-quality businesses rise to the top.

How $500 per month can turn into $30,000 in annual dividends

Consistently investing $500 per month into the Schwab U.S. Dividend Equity ETF will eventually produce a sizable portfolio. Automatically reinvesting the quarterly distribution from the ETF will ensure a good total return on your investments as you accumulate shares over time.

Since its inception in 2011, the fund has produced an annualized total return of 12.2%. That’s an exceptional performance, but it’s also worth pointing out the S&P 500 index has beaten the ETF with an annualized total return of 14.5%. The gap between the two has widened recently due to the outperformance of growth stocks since 2023. Historically, the S&P 500 averages returns around 10% per year, and 9% is more appropriate as a conservative estimate of the ETF’s annual total return.

The ETF’s 4% distribution yield is also relatively high, but it may come down over time as the Federal Reserve lowers interest rates. That said, there’s no telling what prevailing interest rates will be well into the future. A 3.5% yield is a reasonable estimate for the ETF’s future yield.

With those assumptions in mind, here’s how a $500 monthly investment in the Schwab U.S. Dividend Equity ETF could grow over time if you automatically reinvest dividends.

Calculations by author.

There are a few important caveats to the above scenario. First of all, it’s based on forecasts for expected returns and dividend yields that could be well off the mark.

More importantly, those returns won’t be linear over time. The market is full of ups and downs. The sequence and size of those ups and downs could have a tremendous impact on the final result of your investments. That said, the longer your holding period, the more likely your results will look like the table above.

Another important consideration is the impact of inflation: $30,000 won’t have the same buying power in 30 years as it has today. That means investors will have to adjust their expectations or strategy if they want future purchasing power equivalent to $30,000 today. That could mean consistently increasing the monthly contribution, for example.

While your actual results may vary from the above table, the key takeaway for most investors is to get started and remain consistent. The Schwab U.S. Dividend Equity ETF is a great option if you seek dividend growth and income in retirement.

Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbbVie, Chevron, Cisco Systems, Home Depot, and Texas Instruments. The Motley Fool recommends Lockheed Martin and Verizon Communications. The Motley Fool has a disclosure policy.