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

Globe and Mail

01-08-2025

Key Points
There are many forms of passive income.
Investing in dividend-paying stocks is a particularly effective form.
This ETF makes it easy -- and it's recently yielding a hefty 3.9%.
10 stocks we like better than Schwab U.S. Dividend Equity ETF ›
It's hard to beat passive income. Set up your investments and then money flows to you regularly, without your having to do any, or much, work. There are many forms of passive income, too, such as rent checks from properties you own, interest payments from savings accounts or bonds you own, royalties from books you wrote, and dividend income from dividend-paying stocks or dividend-focused exchange-traded funds (ETFs) you own.
Here's a look at a particularly attractive way to collect passive income: the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). As an ETF, it's a fund that trades like a stock. And it offers not only dividend income but growing dividend income and the likelihood of its component holdings growing in value over time as well.
Why dividends?
In case you're not yet sold on the power of dividend investing, check out the table below:
Dividend-Paying Status
Average Annual Total Return, 1973-2024
Dividend growers and initiators
10.24%
Dividend payers
9.20%
No change in dividend policy
6.75%
Dividend non-payers
4.31%
Dividend shrinkers and eliminators
(0.89%)
Equal-weighted S&P 500 index
7.65%
Data source: Ned Davis Research and Hartford Funds.
See? Dividend-paying stocks are not boring investments made by grandparents. They're suitable for all kinds of investors, and they perform rather well, too. That's partly because a company has to grow enough to have fairly dependable income before it will commit to paying a regular dividend.
A passive-income winner: The Schwab U.S. Dividend Equity ETF
There are lots of dividend-focused ETFs, so what's so great about the Schwab US Dividend Equity ETF? Well, while some dividend ETFs deliver lots of income but relatively little growth, and others are strong growers but don't offer that much income, this ETF strikes a nice balance between the two.
The Schwab US Dividend Equity ETF recently sported a very solid dividend yield of 3.9%. It tracks the Dow Jones U.S. Dividend 100 Index, which is "designed to measure the performance of high-dividend-yielding stocks in the U.S. with a record of consistently paying dividends, selected for fundamental strength relative to their peers, based on financial ratios."
As an index fund, it aims to deliver roughly the same return as the index it tracks, less its fees, which are rather puny. The ETF's expense ratio (annual fee) is 0/06%, meaning that you'll fork over $6 per year for every $10,000 you have invested in the ETF.
What's in the Schwab U.S. Dividend Equity ETF?
Here are the ETF's recent top 10 holdings:
Stock
Weight in ETF
Recent yield
Texas Instruments
4.35%
2.53%
Chevron
4.22%
4.56%
PepsiCo
4.16%
3.90%
Cisco Systems
4.11%
2.41%
ConocoPhillips
4.10%
3.36%
Amgen
3.99%
3.11%
Merck
3.92%
3.97%
Altria Group
3.84%
6.86%
AbbVie
3.82%
3.51%
Verizon Communications
3.80%
6.31%
Source: Morningstar.com, as of July 22, 2025.
You can see that these 10 (out of about 100) holdings, which together make up around 40% of the ETF's value, pay meaningful dividends. And as long as they remain healthy and growing, they're likely to increase their payouts over time. For context, note that the S&P 500 index recently yielded 1.23%.
How has the Schwab U.S. Dividend Equity ETF performed?
Finally, here's a look at how the ETF has performed in the past. I'll include the S&P 500's performance for comparison, using the Vanguard S&P 500 ETF (NYSEMKT: VOO):
Fund
3-year average annual gain
5-year average annual gain
10-year average annual gain
Schwab U.S. Dividend Equity ETF
8.14%
12.54%
11.39%
Vanguard S&P 500 ETF
18.49%
15.69%
13.51%
Source: Morningstar.com, as of July 22, 2025.
You can see that, on average, investors are likely to see their money grow faster in a low-fee S&P 500 index fund, but it's not going to produce nearly as much income as the Schwab ETF. Some investors may want to park a portion of their long-term portfolio in each of the ETFs. Either or both will deliver decades of passive income, though one will deliver more.
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Selena Maranjian has positions in AbbVie, Altria Group, Amgen, Schwab U.S. Dividend Equity ETF, and Verizon Communications. The Motley Fool has positions in and recommends AbbVie, Amgen, Chevron, Cisco Systems, Merck, Texas Instruments, and Vanguard S&P 500 ETF. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.