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

Who doesn't want passive income? Even Warren Buffett has extolled it, reportedly saying, "If you don't find a way to make money while you sleep, you will work until you die."

The wealthy have figured it out, and often collect much of their income passively, through dividends and interest, among other things. Even we more average people can benefit from dividend income, and a simple way to get it is via a dividend-focused exchange-traded fund (ETF) -- a fund that trades like a stock and that's invested in many dividend payers.

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Image source: Getty Images.

The power of dividends

Dividends are often underappreciated by investors, especially those of us inclined to chase fast-growing high-flying stocks. But dividend-paying stocks are no slouches. Check out the following table and prepare to be surprised:

Data source: Ned Davis Research and Hartford Funds.

See? We shouldn't be that surprised, though, because a company generally has to become fairly established, with ample reliable income in order to commit to regular dividend payments.

Dividend ETFs

There are many solid income-producing ETFs. I'll list a bunch in the following table, and then I'll focus on a particularly great one from the list. But the list offers more to consider -- including a simple S&P 500 index fund and an ETF focused on preferred stocks, which tend to feature high dividends and little stock-price appreciation.

Data source: Morningstar.com, as of February 6, 2025.

You'll note a wide range of yields and trailing returns. The disparity is partly due to some funds that focus on stocks with smaller, but faster-growing, dividend yields and others that simply seek high yields.

The basic S&P 500 fund at the bottom may not impress with its dividend yield, but remember that, as with the other dividend ETFs, the dividend-paying companies within the index will often be increasing their payouts, so income from the fund should increase over time. And the lower yield is made up for by impressive stock-price appreciation.

Meet the Schwab U.S. Dividend Equity ETF

The Schwab U.S. Dividend Equity ETF is one of the more compelling ETFs in the preceding list, for several reasons:

• It has a solid dividend yield, recently 3.71%, and that payout has been growing over time at a respectable clip. The ETF featured a quarterly dividend payout of $0.27 per share in December of 2024, up considerably from its $0.16 payout in December of 2019.
• Its trailing growth rates are solid, in double digits for the past five and 10 years. (Understand that the next five or 10 years could feature lower returns. The S&P 500 has averaged annual returns close to 10% (ignoring inflation) over long periods, and the past few years have featured higher-than-average returns.)
• It sports an ultra-low expense ratio (annual fee) of just 0.06%, which means you'll have to cough up $0.60 for each $1,000 you've got invested in the fund.

You may also like the ETF's portfolio. As of early February, it held 98 stocks, and these were the top 10, which together made up 42% of the ETF's total value:

Data source: Morningstar.com.

The portfolio, tracking the Dow Jones US Dividend 100 Index, is well balanced by sector, with 18.7% in financial services companies, 17.6% in healthcare stocks, and between 10% and 14% in each of the following sectors: consumer cyclical, energy, industrials, technology, and consumer defensive.

The Dow Jones US Dividend 100 Index, by the way, aims to hold 100 stocks that have paid out dividends for 10 years in a row and which appear financially healthy, suggesting that further dividend payments, if not increases, are likely.

So consider adding some dividend payers to your portfolio, and consider the Schwab U.S. Dividend Equity ETF in particular, as it has a lot to offer.

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Selena Maranjian has positions in AbbVie, Amgen, Bristol Myers Squibb, Pfizer, Schwab U.S. Dividend Equity ETF, and Verizon Communications. The Motley Fool has positions in and recommends AbbVie, Bristol Myers Squibb, Chevron, Cisco Systems, Home Depot, Pfizer, Vanguard Dividend Appreciation ETF, and Vanguard S&P 500 ETF. The Motley Fool recommends Amgen and Verizon Communications. The Motley Fool has a disclosure policy.