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

Key Points

• The Schwab U.S. Dividend Equity ETF owns stocks with strong dividend track records and attractive valuations.

• This index ETF offers a juicy distribution yield.

• However, it can be volatile at times and has only been traded since 2011.

• 10 stocks we like better than Schwab U.S. Dividend Equity ETF ›

Some popular ways of generating passive income aren't all that passive. They often require quite a bit of work.

However, you can't get much more passive than clicking a few buttons to invest in an exchange-traded fund (ETF) and then sitting back as the dividends roll in quarter after quarter. The main effort required is to pick which ETF to buy.

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If you want decades of passive income and an easy decision, I think there's a great alternative: The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). This index fund is a great choice to buy and hold forever, in my opinion.

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Key things to know about this ETF

Charles Schwab Asset Management manages the Schwab U.S. Dividend Equity ETF. This ETF attempts to track the performance of the Dow Jones U.S. Dividend 100 Index. The index focuses on U.S. stocks with high dividend yields, solid track records of paying dividends, and strong financial strength.

The Schwab U.S. Dividend Equity ETF currently owns 103 stocks. Its top holdings include Pepsico, Altria, Chevron, AbbVie, and Home Depot. Three of those stocks are Dividend Kings with at least 50 consecutive years of dividend increases.

There are other common denominators among the stocks in this index fund's portfolio, too. For example, many of the stocks the ETF owns have attractive valuations. The average price-to-earnings ratio for the ETF's holdings is 17, well below the S&P 500's earnings multiple of 29.7. The companies in the fund's portfolio also tend to efficiently generate profits with an average return on equity of 28.2%.

This ETF has been a solid winner for investors over the long run. Its average annual return since inception is 12.25%. However, the performance so far in 2025 hasn't been as spectacular.

Will fees eat significantly into your returns with the Schwab U.S. Dividend Equity ETF? Nope. The fund's annual expense ratio is only 0.06%. Charles Schwab Asset Management can keep these expenses so low because of the fund's passive management style.

A passive income machine

You might have noticed I didn't mention anything about passive income. Don't worry: The Schwab U.S. Dividend Equity ETF is a passive income machine.

The index fund's 30-day SEC yield is 3.81%. Its distribution yield over the last 12 months is even juicier -- 3.87%. You can probably count on receiving annual passive income of at least $3,800 for every $100,000 invested in this ETF.

Some investors might see that the Schwab U.S. Dividend Equity ETF paid a distribution of $0.7545 per share on Sept. 25, 2024, but the distribution fell to $0.2645 on Dec. 16, 2024. Is that a warning sign that the dividends from this fund aren't reliable? Not at all. The reason behind the lower distribution is that the ETF underwent a 3-for-1 stock split on Oct. 10, 2024.

The selection criteria used by the ETF's underlying index make it likely that the dividends will continue flowing and growing. Investors seeking passive income should be reassured that the fund's portfolio will only include stocks with high-quality, sustainable dividends.

Are there any negatives?

No fund is perfect; the Schwab U.S. Dividend Equity ETF is no exception. Probably the biggest knock against this ETF is that it can be volatile at times. For example, during the early part of the COVID-19 pandemic, the fund's price plunged more than 30%.

Also, while I view this ETF as one that can generate passive income for decades, it hasn't been around for decades. The Schwab U.S. Dividend Equity ETF launched in October 2011. As such, it doesn't have a lengthy track record.

I think the positives for this index ETF outweigh its negatives, though. Investors seeking passive income should give the Schwab U.S. Dividend Equity ETF serious consideration.

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Charles Schwab is an advertising partner of Motley Fool Money. Keith Speights has positions in AbbVie and Chevron. The Motley Fool has positions in and recommends AbbVie, Chevron, and Home Depot. The Motley Fool recommends Charles Schwab and recommends the following options: short September 2025 $92.50 calls on Charles Schwab. The Motley Fool has a disclosure policy.