How can you generate passive income? You could buy real estate property and rent it out. You could create something that makes money, such as a book or mobile app. However, there are other alternatives that don't require as much effort.
Want decades of passive income? Buy a solid dividend-paying index fund and hold it forever. And I have a great exchange-traded fund (ETF) specifically in mind.
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"Dividend" is in its name
The Schwab US Dividend Equity ETF (SCHD +0.07%) is an ideal choice for investors seeking passive income, in my opinion. This ETF attempts to track the total return of the Dow Jones U.S. Dividend 100 Index.
With "dividend" in its name, you'd probably expect the Schwab US Dividend Equity ETF to offer an attractive dividend. The fund meets those expectations. Its 30-day SEC yield is roughly 3.9%. Over the last 12 months, the ETF's distribution yield was only slightly lower at 3.8%.
Charles Schwab (SCHW 0.53%) Asset Management launched the Schwab US Dividend Equity ETF on Oct. 20, 2011. Since then, it has delivered an annualized return of 12.4%.
NYSEMKT: SCHD
Key Data Points
Fees won't eat up much of the growth and income this ETF offers. The Schwab US Dividend Equity ETF's annual expense ratio is a low 0.06%. That's a positive side effect of the passive management approach you get with index funds.
While the overall stock market is priced at a historically high level, valuation isn't a major concern with this fund. The average price-to-earnings ratio for the stocks in its portfolio is around 17.5, well below the S&P 500's lofty earnings multiple of 31.5.
A high-caliber portfolio
The reason why the Schwab US Dividend Equity ETF is such a great choice for investors desiring passive income is its high-caliber portfolio of dividend stocks. The Dow Jones U.S. Dividend 100 Index that the ETF attempts to track focuses on U.S. stocks with high dividend yields, impressive track records of dividend payments, and strong financial ratios.
This ETF currently owns 103 stocks. No single stock makes up more than 4.4% of the total portfolio. Around 58% of the fund's holdings have market caps of over $70 billion.
The Schwab US Dividend Equity ETF's largest holding, AbbVie (ABBV 0.16%), provides a great example of the kind of stock investors get with this ETF. AbbVie is a member of the elite group of stocks known as Dividend Kings, which have increased their dividends for at least 50 consecutive years. The big drugmaker's forward dividend yield is roughly 2.9%.
Three other Dividend Kings are also in the ETF's top 10 holdings. The Schwab US Dividend Equity ETF owns similar-sized stakes in huge food and beverage companies PepsiCo (PEP +0.29%) and Coca-Cola (KO +0.93%). Tobacco giant Altria Group (MO 0.14%) makes up around 3.9% of the fund's total assets and pays an exceptionally high dividend yield of almost 6.6%.
Passive income forever?
With the Schwab US Dividend Equity ETF only available for 14 years, can we really assume this fund can generate passive income forever? I think it can come close enough for practical purposes.
The fund's managing firm, Charles Schwab, has been around since 1971. Also, the Schwab US Dividend Equity ETF has a whopping $70 billion in net assets. That kind of money translates to staying power.
The approach taken by the fund's underlying index should ensure that the dividends will continue to flow and grow for a long time to come, too. Stocks that underperform in any key area are winnowed out and replaced with stronger contenders regularly. This ETF's portfolio turnover rate is around 30%.
Some investors might prefer real estate or creative content for making passive income. If you want an easier option, though, I think the Schwab US Dividend Equity ETF could be it.
