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

The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is passively managed and comes with very cheap fees for investors, with an expense ratio of just 0.06%, meaning the annual cost for investors is 0.06% of the fund's total invested assets.

SCHD typically invests in stocks found in the Dow Jones U.S. Dividend 100 Index, which excludes real estate investment trusts (REITs), master limited partnerships, preferred stocks, and convertibles. Stocks included in this index all have a decade of dividends under their belt and a minimum market cap of $500 million. The fund also looks for stocks that are fundamentally stronger than others in their peer group.

The index then evaluates members bases on four key metrics: cash flow to debt, return on equity, dividend yield, and five-year dividend growth rate. Most of the largest holdings in the fund are large-cap U.S. stocks with household brands. Here are the top 10 holdings by percentage of total fund assets:

AbbVie: 4.22%

ConocoPhillips: 4.10%

Chevron: 4.09%

Home Depot: 4.08%

Lockheed Martin: 4.08%

Cisco Systems: 4.04%

Verizon: 4.01%

Amgen: 3.99%

Altria Group: 3.97%

Coca-Cola: 3.91%

Just looking at this group above, there are some elite dividend payers here. Coca-Cola has paid and increased its annual dividend for 63 years, while Altria has accomplished the same feat for 56 years. When companies have paid dividends for this long, it becomes a big reason to buy their stock, making it even more imperative that these companies continue to pay and increase their dividends.

I also notice a wide variety of sectors represented among this group above. AbbVie is a pharma company; Chevron is an oil company; Home Depot is largely for home improvement; and Altria Group sells nicotine and smokeless tobacco products, giving investors a group of stocks that will perform differently at different parts of the economic cycle.

Collecting decades of passive income

As of Sept. 23, SCHD had a trailing 12-month dividend yield of 3.82%, which is considered strong among dividend stocks. SCHD has been a good dividend payer since launching in 2011, and has generally increased its dividend each year.

However, investors should keep in mind that SCHD's dividends won't always be linear because the fund adjusts to changes in the Dow Jones U.S. Dividend 100 Index, which conducts a reconstitution each year, removing some names that no longer fit the fund's parameters and replacing them with new ones. Still, through its life, SCHD has averaged a good dividend yield.

SCHD Dividend Yield data by YCharts

For a strong dividend payer, the fund also hasn't performed too badly from a price appreciation perspective, and is up close to 50% over the last five years. Now, that's not nearly as good as the broader benchmark S&P 500, which has more than doubled over the past five years, but it's largely been a bull market.

SCHD isn't likely to outperform the broader market in a bull market, but its reliable dividend should create strong passive income throughout the economic cycle, making it more predictable. The price appreciation is really just a bonus.