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

If you want decades of passive income, it’s time to look at the iShares S&P/TSX Composite High Dividend Index ETF (TSX:XEI). Managed by the experts at BlackRock, the world’s largest fund manager, this $3.5 billion exchange traded fund (ETF) pays monthly dividends from a portfolio designed to be a “set-and-forget” cornerstone of your retirement.

We’ve all been there: staring at a spreadsheet of several different stocks, trying to remember which ones pay in January and which ones hike their dividends in June. It’s exhausting at times. Most investors believe they have to choose between a high-growth portfolio and a high-yield income stream. But what if you could have both — without the headache of tracking dozens of individual companies?

Since its inception in 2011, the XEI ETF offers instant diversification, reliable monthly distributions, and the potential for capital growth, making it one of the best dividend ETFs to buy and hold forever for decades of passive income.

The magic of the XEI ETF’s monthly distributions

The genius of the iShares S&P/TSX Composite High Dividend Index ETF lies in how it handles your cash flow. It holds a robust portfolio of 75 high-dividend-paying Canadian blue-chips. While these companies typically pay out quarterly, the dividend ETF converts that income into regular monthly distributions. This provides instant diversification and eases the pain of manually managing 75 different positions.

Best of all, the XEI ETF has a proven record of paying uninterrupted regular monthly dividends nonstop for at least a decade. Even better? Those dividends have increased by an average of 8.4% over the past five years, helping your purchasing power stay ahead of inflation.

A historical performance that defies the “income fund” label

Many income-focused funds can be yield traps that pay a high dividend while the stock (or unit) price slowly withers away. The XEI ETF flips that script. It retains strong capital gains potential and doesn’t employ risky leverage or expensive layers of derivatives, like the covered call strategies that often cap your upside.

The historical results speak loudly for themselves. The ETF has generated a total return of 228.9% over the past decade. It more than doubled over the past five years alone while dividends increased by 47%. Recently, the ETF has been on a tear, up 13.4% year to date.

XEI data by YCharts

This outperformance is largely thanks to its high exposure (now 31.4%) to the Canadian energy sector, which has run hot due to global oil supply constraints.

A proactive shield for your portfolio

Why should you buy an index fund instead of simply picking the top five yielders on the TSX? That’s because the XEI ETF is more proactive. The fund’s underlying index screens the TSX Composite Index every single month for potential additions and deletions. It’s ruthless: if a stock eliminates, suspends, or even omits a dividend, it is removed. This ensures that failing companies don’t drag down the income contributions to your ETF.

By investing in this monthly dividend ETF, you get broad exposure across 11 sectors of the Canadian economy, tilted towards the dividend heavyweights in the Financial sector, comprising 29.2% of the portfolio, followed by Energy at 31.4%, Utilities at 13.1%, and Communications stocks making up 8.5% of the portfolio.

The cost of dividend quality

Quality usually comes with a high price tag, but not here. With a management expense ratio (MER) of just 0.22%, you are only paying about $2.20 annually for every $1,000 you invest. For that small fee, you get a managed portfolio of 75 stocks that averages a P/E of 16.3 and sources its income from the most reliable blue-chip stocks in Canada.

Investor takeaway

While the recent market run has slightly reduced the ETF’s current yield from 4% to 3.7% annually, the total return potential remains formidable. Capital gains grow your overall portfolio, making you richer in retirement and extending the time your assets can fund your desired lifestyle.

If you’re looking for a “forever” asset that provides a respectable yield today and capital upside for tomorrow, the XEI ETF is the kind of asset you buy today and hold forever.