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

Investors should always diversify their portfolios, but it's absolutely crucial when it comes to dividend stocks. It would be a nightmare scenario if something happened to a stock that you depended on for a significant chunk of your investment income.

Fortunately, exchange-traded funds (ETFs) make diversification quick and straightforward. One fund could represent hundreds, even thousands, of individual companies. The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is one of the best dividend ETFs to buy for anyone looking for decades of passive income.

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Here are five reasons why any long-term dividend investor should consider buying and holding it forever.

Image source: Getty Images.

1. Easy, quick dividend diversification

The Schwab U.S. Dividend Equity ETF tracks the Dow Jones U.S. Dividend 100 Index, a bucket of approximately 100 large-cap U.S. dividend stocks across various market sectors, including energy, consumer staples, healthcare, industrials, financials, technology, consumer discretionary, and communications services.

The ETF features mature companies with track records of paying and raising dividends. The Schwab U.S. Dividend Equity ETF's top 10 positions account for 41% of the fund and include:

Data source: The Schwab U.S. Dividend Equity ETF prospectus. Table by author.

The remainder is spread across abiut 90 dividend stocks, offering investors a healthy dose of portfolio diversification through a single ticker symbol.

2. It offers a meaningful amount of income from day one

An investment's initial dividend yield isn't everything; a lot of the magic happens over time as the dividend grows. Still, unless you're very young, it's nice to start with meaningful dividend income.

The Schwab U.S. Dividend Equity ETF delivers an impressive 30-day SEC yield of almost 3.9% at its current price. For comparison, the S&P 500 yields approximately 1.3%, so investors are getting roughly three times as much passive income for their buck as they would from the broader U.S. stock market.

3. A history of paying you more over time

Ideally, your investment income will grow over time -- at least fast enough to keep up with inflation. Fortunately, the Schwab U.S. Dividend Equity ETF has done well here, too. As shown, the fund's dividend has trended in the right direction over time, growing by more than 500% cumulatively since its inception in late 2011.

SCHD Dividend data by YCharts

The ETF rebalances quarterly and reconstitutes annually, so its makeup could change over time, and the dividend may not always increase at this rate. Still, the Schwab U.S. Dividend Equity ETF has demonstrated over the past 14 years that it's reasonable to anticipate those dividends growing larger over the decades to come.

4. It has delivered solid total returns over the years

There is sometimes a misperception that investing for passive income must come at the expense of total investment returns. While it's true that stocks of mature companies often come with higher dividend yields and lower price appreciation, investors can still achieve a mix of both income and growth, and the Schwab U.S. Dividend Equity ETF has delivered just that outcome.

SCHD Total Return Level data by YCharts

The ETF doesn't attempt to track the S&P 500 index, but it has produced competitive total investment returns for most of its existence, up until the past few years. The Schwab U.S. Dividend Equity ETF only has about 8% exposure to the technology sector, which has caused the ETF to lag the "Magnificent Seven"-heavy S&P 500 since the artificial intelligence (AI) boom began in 2023.

5. The ETF could be a bargain today

The AI boom has lifted the broader market to a lofty valuation. The S&P 500's current price-to-earnings (P/E) ratio (28) is notably above its average over the past decade. The Schwab U.S. Dividend Equity ETF's blended P/E ratio is currently 16. Many of the ETF's top holdings aren't exactly high-growth names, but it's clear that the ETF trades at a steep discount to the broader market, and at a time when the latter is trading well above its norms.

This doesn't matter as much if you're buying the ETF to hold for decades of passive income, but it's always good to buy up a deal, and the ETF's current valuation means it could perform better relative to the broader market if the AI craze cools off some.

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amgen, Chevron, Cisco Systems, Home Depot, and Texas Instruments. The Motley Fool recommends Lockheed Martin and Verizon Communications. The Motley Fool has a disclosure policy.