The idea of generating a passive income stream from your investments is relatively straightforward. Simply buy the stocks of dividend-paying companies, collect the quarterly distributions, and repeat the process over time.
The harder part is figuring out which dividend stocks are the best for the job. You could choose one with a yield of around 5% or higher, but those could be especially volatile or vulnerable to a dividend cut. Just look what happened to Campbell's not too long ago.
That's why passive income strategies are usually at their best when they're built around stable, high-quality companies with healthy balance sheets and a history of paying and growing their dividends.
You could spend a lot of time researching and selecting stocks for this. Or you could choose the Schwab U.S. Dividend Equity ETF (SCHD -0.75%) and have the work done for you.
Image source: The Motley Fool.
SCHD does most of the work for you
The Schwab U.S. Dividend Equity ETF tracks the Dow Jones U.S. Dividend 100 Index. It owns roughly 100 stocks selected for their history of paying dividends. It also considers several fundamental metrics, including cash flow relative to debt, return on equity (ROE), dividend yield, and five-year dividend growth rate. Essentially, it's trying to identify stocks with higher yields that are sustainable and well-supported by financial strength.
The emphasis on yield with quality is what makes this ETF stand out. It offers a consistent passive income stream much greater than that of many of its large-dividend ETF peers.
| Ticker | Fund Name | Dividend Yield |
|---|---|---|
| SCHD | Schwab U.S. Dividend Equity ETF | 3.2% |
| VIG | Vanguard Dividend Appreciation ETF | 1.4% |
| VYM | Vanguard High Dividend Yield ETF | 2.2% |
| DGRW | WisdomTree U.S. Quality Dividend Growth ETF | 1.2% |
| DGRO | iShares Core Dividend Growth ETF | 2% |
| CGDV | Capital Group Dividend Value ETF | 1.2% |
Data source: Fund websites.
With a 3.2% yield, the Schwab U.S. Dividend Equity ETF would generate approximately $3,130 in annual dividend income on a $100,000 investment based on the current distribution rate. Make a half-million-dollar investment, and that income stream jumps to more than $15,000 annually.
While the quarterly payments will experience some fluctuation, this illustrates how meaningful a passive income stream this fund can generate.
NYSEMKT: SCHD
Key Data Points
With an expense ratio of just 0.06%, you can own this portfolio, which is regularly rebalanced and revamped, for next to nothing.
Investors who want a simple dividend strategy they can hold for years and have deliver a consistent, predictable passive income stream should consider the Schwab U.S. Dividend Equity ETF. Its combination of quality, dividend growth, and yield is almost unparalleled in this category.
