Want to Generate Thousands of Dollars in Passive Income While Barely Lifting a Finger? This Dividend ETF Could Get You There.

A $50,000 investment in the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) would generate around $850 in annual dividend income at its recent share price and current yield. Here's where things get even more interesting. This dividend ETF has grown its payout at a 7.3% compound annual rate over the last decade. If it maintains that pace, it would generate over $3,500 a year in annual dividend income in two decades, all without lifting a finger or adding another dollar to your investment.

Here's a closer look at this fund, which makes it easy to collect passive dividend income.

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Built to easily invest in dividend growth stocks

The Vanguard Dividend Appreciation ETF is the largest dividend-focused ETF by assets under management at over $111 billion. The reason so many investors trust this fund for their dividend income needs is its simple strategy. The ETF passively tracks the S&P U.S. Dividend Growers Index, which holds U.S. stocks that have increased their dividends for at least 10 consecutive years. It excludes REITs (which pay non-qualified dividends) and the top 25% of companies by dividend yield (to avoid potential yield traps).

It currently holds 333 stocks with strong records of dividend growth that should continue. It weights its holdings by market cap, so the largest companies rank highest. Its top three holdings are large tech companies. While they all have lower dividend yields, they have strong records of dividend growth. What's nice about this fund is that you don't need to hunt for dividend growth stocks and actively manage a portfolio. You just buy this fund and let it do all the work.

More on the math

Unlike some dividend ETFs, VIG doesn't have a particularly high current yield. It has a 1.7% yield if you annualize the last dividend payment and divide it by the ETF's recent share price, which is higher than the S&P 500's yield of roughly 1.1%. At VIG's current yield, every $10,000 invested into the ETF would generate around $170 of annual dividend income. However, because this fund focuses on dividend-growth stocks, its income should steadily rise. The annual dividend income would more than quadruple over two decades if the ETF continues to grow its payout at a compound annual rate of over 7%.

On the flip side, a low current yield means this fund leans on growth and will take time to reach a larger income figure. That also suggests that the more you invest now, the more income you'll collect in the future. While you can build your position over time, you'd likely need to invest more over the long term to generate meaningful future dividend income, unless the fund grows its payout faster in the future. There's also the risk that it grows its income more slowly in the future, implying it would take more time to reach a meaningful income stream.

A set-and-forget dividend ETF

The Vanguard Dividend Appreciation ETF passively tracks an index of companies that pay growing dividends. While it has a low current yield, it can richly reward patient investors as its holdings continue to increase their dividends. That makes it a low-effort way to potentially generate thousands of dollars of annual dividend income once you retire.

Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Dividend Appreciation ETF. The Motley Fool has a disclosure policy.