How can you generate passive income? To borrow a phrase from William Shakespeare, "Let me count the ways."
Rental properties come to mind for many people when they think of passive income. Some choose affiliate marketing. Creating online videos that attract advertisers has also become popular.
I think, though, that there's an even easier alternative. Do you want decades of passive income? Buy the Schwab U.S. Dividend Equity ETF (SCHD -0.44%) and hold it forever.
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A passive income machine
The Schwab U.S. Dividend Equity ETF attempts to track the performance of the Dow Jones U.S. Dividend 100 Index. It currently owns 103 stocks, with top holdings including Texas Instruments (TXN -0.03%), Chevron (CVX -1.11%), ConocoPhillips (COP -1.26%), Merck (MRK -1.91%), and Cisco Systems (CSCO -0.37%).
Investors seeking passive income should love that the Schwab U.S. Dividend Equity ETF has a great track record of growing its distribution. Since the fund's inception on Oct. 20, 2011, its distribution has increased by an impressive 541%. That translates to a compound annual growth rate of around 14%.
Over the last 12 months, this exchange-traded fund (ETF) has delivered a distribution yield of 3.87%. Its 30-day SEC yield is slightly lower at 3.85%. An investment of $100,000 at the lower of those two yields would generate annual income of $3,850. That's not bad money without having to exert any effort beyond buying the Schwab U.S. Dividend Equity ETF.
More to like about this ETF
Income investors should also appreciate that the Schwab U.S. Dividend Equity ETF is relatively low risk. Sure, the Dow Jones U.S. Dividend 100 Index that it tracks focuses on high-yield dividend stocks, which sometimes come with higher risk levels. However, the managers of the index select stocks that have records of consistency in paying dividends. They also look for the stocks of companies that are financially strong compared to their peers.
An attractive valuation contributes to the less risky profile of this ETF. The average stock in the fund's portfolio trades at under 16 times trailing 12-month earnings. Although that's not extraordinarily cheap, it's much less than the S&P 500's (^GSPC -0.01%) price-to-earnings multiple of nearly 30.
The Schwab U.S. Dividend Equity ETF's long-term performance isn't too shabby, either. Since its inception, the ETF has delivered an average annual return of 12.3%. Over the last five years, the fund's average annual return was 12.9%
You won't pay through the nose for this top-tier dividend ETF. Its annual expense ratio is a modest 0.06%. The fund's low costs are a direct reflection of its passive management approach.
Last, but not least, liquidity isn't a problem at all with the Schwab U.S. Dividend Equity ETF. The fund's total net assets top $70.2 billion. Its average daily trading volume is roughly 16 million shares. While I think buying and holding this ETF forever is a great strategy, you'll be able to easily sell it when needed.
The best dividend ETF of all?
Is the Schwab U.S. Dividend Equity ETF the best dividend ETF on the market right now? I think there's a strong argument that it is.
Granted, you can find dividend ETFs that offer higher yields. For example, the SPDR Portfolio S&P 500 High Dividend ETF's (SPYD 0.23%) distribution yield is nearly 4.5%. The JPMorgan Nasdaq Premium Equity Income ETF (JEPQ -0.13%) sports an ultra-high yield of 11.3%.
However, a high yield isn't everything. The reliability of the distributions, potential for distribution growth, and history of overall returns are important factors to consider as well. The Schwab U.S. Dividend Equity ETF scores highly in all of these categories.
I won't try to claim that the Schwab U.S. Dividend Equity ETF is indisputably the best dividend ETF of all. But it's near the top of the list, in my opinion.
