There are many types of passive income, such as interest from a certificate of deposit or bond, or rent from a tenant, or a monthly check from an annuity. My personal favorite form of passive income is dividend income from dividend-paying stocks or dividend-focused exchange-traded funds (ETFs).
Why pay dividends? Well, dividend-paying stocks provide income without having to sell any shares, and over time the value of each share tends to increase – and so does the size of the dividend. It’s a win-win-win!
Here are one of my favorite dividend-focused exchange-traded funds (ETFs) – Schwab U.S. Dividend Stocks ETF (NYSE: SCHD).
The Charles Schwab U.S. Dividend Stocks ETF tracks the Dow Jones U.S. Dividend 100 Index, which is “designed to measure the performance of U.S. high-dividend-yielding stocks with a track record of consistent dividend payments and selected based on financial ratios based on fundamental strength relative to their peers.”
The index contains about 100 stocks with at least a 10-year track record of paying dividends, and these stocks also appear to be associated with high-quality companies. Here’s how the Schwab ETF has performed in recent years:
|
ETF |
yield |
5-year average annual return |
10-year average annual return |
15-year average annual return |
|---|---|---|---|---|
|
Schwab U.S. Dividend Stocks ETF |
3.8% |
9.45% |
12.86% |
12.30%* |
|
Vanguard S&P 500 ETF |
1.1% |
14.62% |
15.90% |
13.92% |
Data source: Morningstar.com, as of January 16, 2026.
*As of the date of establishment, October 20, 2011
This is really impressive. I listed the numbers that Vanguard touted S&P 500 Index The comparison between index funds and the Schwab ETF is pretty good — though, there’s no denying that over the past 12 months (through January 16), the Schwab ETF was up just 7.9%, while the S&P 500 ETF was up 18.3%.
A key reason for this difference is that S&P 500 index funds, like the index, are fairly top-heavy in technology stocks. The S&P 500 ETF recently invested 35% of its assets in technology stocks, while the Schwab ETF held just 9%.
The S&P 500’s concentration worked well for it—until it didn’t anymore. Many people wouldn’t be surprised to see the overall stock market pull back and take a breather in 2026, and if that happens, tech and growth stocks (which have a lot of overlap) tend to fall harder than the overall market. In times like this, this Charles Schwab Dividend ETF may perform better.
Here are more reasons to consider the Charles Schwab U.S. Dividend Stocks ETF:
-
Its dividend yield is quite high, recently at 3.8%. That’s larger than many dividend-focused ETFs, and it doesn’t come at the expense of growth. This ETF offers a compelling combination of income and growth.
-
This ETF has a very low expense ratio (annual fee) of 0.06%, which means you pay less than $1 (just $0.60) for every $1,000 invested in the fund each year.
Take a look at the ETF’s largest recent holdings, which recently accounted for about 41% of the fund’s value:
|
in stock |
ETF weights |
|---|---|
|
Lockheed Martin |
4.59% |
|
Bristol-Myers Squibb |
4.22% |
|
Chevron |
4.16% |
|
Merck |
4.12% |
|
ConocoPhillips |
4.09% |
|
home depot |
4.02% |
|
Altria |
4.00% |
|
Texas Instruments |
3.93% |
|
Coca Cola |
3.78% |
|
Pepsi |
3.76% |
Data source: Morningstar.com, as of January 16, 2026.
Any long-term investor looking for income should seriously consider this solid ETF. Know that there are other excellent ETFs out there, including some promising growth ETFs. You can mix and match to suit your risk tolerance and investment goals.
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Selena Maranjian holds positions in the Altria Group, Bristol-Myers Squibb, and Charles Schwab U.S. Dividend Stock ETFs. The Motley Fool holds and recommends Bristol Myers Squibb, Chevron, Home Depot, Merck, Texas Instruments and Vanguard S&P 500 ETFs. The Motley Fool recommends ConocoPhillips and Lockheed Martin. The Motley Fool has a disclosure policy.
Want decades of passive income? Buy this index fund in 2026 and hold it forever. Originally posted by The Motley Fool