Investing $5,000 in SCHD Now Could Generate Serious Passive Income Over 20 Years

The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) has been and remains one of the most popular dividend exchange-traded funds (ETFs) out there. Its strategy, which targets high-quality companies with lengthy dividend histories and above-average yields, has been one of the most durable and successful dividend ETFs for shareholders.

Currently, the fund pays around 3.3% annually. On an initial $5,000 investment, that would generate roughly $165 in dividends annually. That's solid on its own, but the more impressive numbers come from what happens if you hold on to that investment for decades.

How your SCHD dividends compound into something bigger over time

Successful investing occurs when you're able to let the power of compounding do most of the work for you. Early on, most of your account balance growth is going to come from the money you're investing into it. After many years, the majority of growth will instead come from compounding earnings on your investment. Much less will come from what you're adding.

The same thing applies to dividend investing. If you reinvested your dividends and let your investment grow over time, you'd eventually reach a point where you'd be earning much more annually on that initial investment than you'd probably imagine.

Let's take a look at an example using the Schwab U.S. Dividend Equity ETF. Assume a $5,000 initial investment, a 3.3% yield, and a 10% annual return. All dividends get reinvested. Here's a year-by-year table of how the dividends and overall account balance would grow over time.

Year	Principal	Annual Return	Dividend Income	Capital Gain
1	$5,000	10%	$165	$335
2	$5,500	10%	$182	$369
3	$6,050	10%	$200	$405
4	$6,655	10%	$220	$446
5	$7,321	10%	$242	$491
6	$8,053	10%	$266	$540
7	$8,859	10%	$292	$594
8	$9,745	10%	$322	$653
9	$10,719	10%	$354	$718
10	$11,791	10%	$389	$790
11	$12,970	10%	$428	$869
12	$14,267	10%	$471	$956
13	$15,694	10%	$518	$1,052
14	$17,264	10%	$570	$1,157
15	$18,990	10%	$627	$1,272
16	$20,889	10%	$689	$1,400
17	$22,978	10%	$758	$1,540
18	$25,276	10%	$834	$1,694
19	$27,804	10%	$918	$1,863
20	$30,585	10%	$1,009	$2,049

Source: Author example.

You may only earn a 3.3% dividend yield on a year-over-year basis. But the dividend you earn every year going forward based on your initial investment (called yield-on-cost) will continue to grow larger and larger.

By year 20, you'd be earning more than $1,000 in dividends annually from your initial $5,000 investment. That's a 40% yield on cost!

One of the biggest advantages of investing is the power of compounding -- the idea that you can keep getting earnings on your earnings over time. Given enough years, even smaller initial investments can turn into powerful passive income streams!

David Dierking has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.