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

In the world of work, more activity often means more productivity. More sales. More output. More accomplishment.

The same doesn't apply when it comes to investing, though. Indeed, highly active investors often end up undermining their own performance, with too much trading and too many stocks to monitor. When it comes to investing, less is more. Less trading and less complexity often lead to better results.

With that as the backdrop, if you're looking for solid and simple dividend income for a long, long time, there's at least one dividend index fund that's a must-have for your portfolio. That's the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). Here's why.

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This ETF is lagging for good reason

It's certainly not the only dividend-focused exchange-traded fund (or ETF) to choose from. The Vanguard Dividend Appreciation ETF and the iShares Core Dividend Growth ETF are popular options as well.

It's not the best-performing dividend fund out there either. Since the market's mid-2023 low, SCHD's 24% gain dramatically trails the S&P 500's (SNPINDEX: ^GSPC) advance of 90%.

The Schwab U.S. Dividend Equity ETF does beat the other two top ETFs in this space in one important way. That's its yield. This fund's trailing dividend yield currently stands at just under 3.9%, versus VIG's 1.6% and DGRO's 2%.

What gives? Blame the Schwab fund's underlying index -- the Dow Jones U.S. Dividend 100 Index. It only includes stocks with at least 10 consecutive years of per-share dividend growth. The equal-weighted index also prioritizes higher yields along with free cash flow, and prefers lower-debt companies. The end result is a basket of well-established quality dividend payers, which notably excludes AI-powered winners like Nvidia and Broadcom. With an average trailing price-to-earnings ratio of less than 17, in fact, SCHD is far more of a value fund than a growth fund, and value stocks just aren't what the crowd wants these days.

But that could be about to change.

Strategic timing

The worries that artificial intelligence stocks are in a price bubble are legitimate. The collective forward-looking price-to-earnings ratio of the "Magnificent Seven" is 28.2 (according to data from Yardeni Research) -- sky-high compared to the average projected P/E of just under 20 for every other name in the S&P 500. While nobody denies the advent of AI represents a fantastic growth opportunity, this steep valuation still doesn't quite make sense.

Popping the AI bubble wouldn't likely just mean a price correction for these overinflated tickers, however. As was the case with past buying manias like the ones surrounding solar power, 3D printing, dot-coms, gold (several times), NFTs, cannabis, and others, a steep price reset for artificial intelligence stocks right now could also serve as a reset in how investors view the broad market and weigh risk. More to the point, it could finally make value stocks the must-haves over growth names again, as is often the case when interest rates are up like they are now.

There are exceptions, of course. And if there was ever a scenario in which certain stocks could fight the historical tendency, artificial intelligence stocks could do so.

For what it's worth, though, Goldman Sachs analyst Eric Sheridan recently opined:

I will be brutally frank in saying that if the [investment] dollars keep rising, we will struggle to answer the ROI question based on what we know today. In every computing cycle I've ever analyzed, that has eventually led to a trough of disillusionment. I would be shocked if we avoided one this time.

It implies that any net upside of AI's adoption is already priced into these tickers.

Regardless, the Schwab U.S. Dividend Equity ETF brings an important strategic advantage to the table, no matter what awaits AI stocks. That is, even if the Federal Reserve decides to lower interest rates in the foreseeable future, this may actually boost the high-yielding stocks that make up the Schwab U.S. Dividend Equity ETF. See, these stocks' dividend yields are adjusted in sync with prevailing interest rates. If interest rates move lower, the yields on these dividend payers will be adjusted lower by higher prices of the stocks themselves.

If you get into SCHD now, however, the effective yield on your investment remains at 3.9%, plus whatever dividend growth these companies dish out going forward.

Just a smart income holding for any and all environments

This near-term strategic edge isn't everything, of course -- just a little bonus for having enough forethought to prepare for what's coming rather than hoping the recent past repeats itself. But even if the shift from growth's leadership to value's leadership doesn't materialize right away, you'll still be OK.

More than anything, however, the Schwab U.S. Dividend Equity ETF is the kind of income investment you can buy and stick with indefinitely. Schwab's investment management arm makes any necessary adjustments to the fund's portfolio, ensuring you're always holding the top dividend payers at any given time.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group, Nvidia, and Vanguard Dividend Appreciation ETF. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.