Want Decades of Passive Income? Buy This ETF and Hold It Forever

Contrary to a common assumption, not all dividend ETFs are the same. Most of the popular ones are surprisingly different from one another, in fact, posing a risk to investors who don't shop around for the one that best meets their particular needs.

With that as the backdrop, what's the best exchange-traded fund for income-seeking investors to buy right now with plans to hold it forever? It's arguably the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). Here's why.

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One of these things is not like the others

Anybody keeping tabs on the market's top dividend ETFs might be surprised at the suggestion. Schwab's flagship dividend fund has famously lagged most of the other major tickers in this category since late-2023, including the popular Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) as well as the Vanguard High Dividend Yield ETF (NYSEMKT: VYM).

The only other similar ETF it has outperformed (with or without the inclusion of any dividends paid during this period) is the ProShares S&P 500 Dividend Aristocrats® ETF (NYSEMKT: NOBL). (The term Dividend Aristocrats is a registered trademark of Standard & Poor's Financial Services, LLC.) But even the Dividend Aristocrats have dramatically underperformed the broad market during this period.

SCHD Total Return Level data by YCharts

Blame the nature of the underlying index, mostly.

The Schwab U.S. Dividend Equity ETF is meant to mirror the performance of the Dow Jones U.S. Dividend 100™ Index, which only buys high-yielding tickers of the highest fundamental quality at attractive valuations. Notably, this index doesn't hold any stakes in any of the hottest artificial intelligence stocks that have performed so well of late (and are found in the other aforementioned funds).

Instead, SCHD's top holdings right now are boring ol' defense contractor Lockheed Martin, drugmaker Bristol Myers Squibb, energy outfit Chevron (NYSE: CVX), and pharma giant Merck. These are all solid companies in their own right. They're just not what the market's been clamoring for in an era dominated by artificial intelligence mania.

This is a scenario, however, where interested investors would be wise to think carefully about their long-term goals rather than making a snap decision based on a misleading gut feeling.

SCHD offers everything buy-and-hold income investors actually want

If you're looking for decades of passive income from dividend stocks, capital gains aren't your top concern. Your chief concern is the reliability and growth of those dividend payments, and getting them started on the right foot. Schwab's U.S. Dividend Equity ETF checks off all three boxes.

As for the reliability factor, consider the names that make up the underlying index. The Dow Jones U.S. Dividend 100™ Index requires a minimum of 10 consecutive years of annual dividend growth, but that's just a starting point. It also shops around for the names with the highest free cash flow and the highest return on equity, and then only buys the best of the best.

Dividend growth isn't a stumbling block, either. While the index requires at least 10 straight years of increased annual payments, most of the names held by the ETF boast a far better track record than not. And these are not just modest increases. This fund's full-year payout is now more than 50% higher than it was just five years ago. That's an average annual dividend growth of around 9%, easily outpacing inflation during this stretch.

And as for getting started on the right foot, newcomers would most definitely be doing that. This ETF's trailing dividend yield currently stands at 3.8%, versus ProShares' S&P 500 Dividend Aristocrats® ETF's yield of less than 2.2% and even the Vanguard High Dividend Yield ETF's trailing yield of just under 2.5%.

The irony? The disinterest in companies that aren't directly driving or participating in the AI revolution -- which has pumped up SCHD's dividend yield by keeping these stocks' prices suppressed -- may be about to reverse course. If and when artificial intelligence stocks don't justify their lofty valuations, we're likely to see a rekindled swell of interest in the value names that make up the Dow Jones U.S. Dividend 100™ Index.

If you want it, sooner is better than later

Income investors don't necessarily need that recovery in the near future, to be clear, if they need it at all. Again, you're not likely looking to sell this position anytime soon. You're simply looking for reliable passive dividend income that at least keeps pace with inflation. The Schwab U.S. Dividend Equity ETF offers this whether its holdings' prices bounce back in the foreseeable future or not.

That being said, there's no reason to doubt that these stocks and the fund itself will experience better price appreciation sooner or later, and likely sooner than later. If you're shopping around, there's a case to be made for locking in a good dividend yield on your invested capital while you can here.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb, Chevron, Merck, ProShares S&P 500 Dividend Aristocrats ETF, Vanguard Dividend Appreciation ETF, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.