Want a Portfolio That Generates Decades of Passive Income Without You Lifting a Finger? Here's Where to Start.

Some people overcomplicate the way they approach passive income investing.

They spend hours researching dividend stocks, looking at earnings reports, and trying to assess whether a company can continue paying a sustainable dividend. Then they repeat this dozens of times.

The process can become significantly easier and less stressful if you choose to go with dividend exchange-traded funds (ETFs) instead.

With just a handful of ETFs (or maybe just a single all-in-one fund), investors can build a diversified portfolio that does nearly all the work for them. They can continue generating passive dividend income for years or even decades.

Here are three ways to approach it.

Option 1: Let one dividend ETF handle everything

For investors who want to keep things as simple as possible, the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is the way I'd choose to go. It tracks an index of roughly 100 dividend-paying companies selected using all three of the most important dividend stock selection criteria: dividend quality, high yield, and dividend growth. These screens act as cross-checks against each other and help produce a true "best of the best" portfolio.

The thing I like about the Schwab U.S. Dividend Equity ETF is that the comprehensive strategy addresses individual weaknesses. High yielders, for example, can be lower-quality and vulnerable to dividend cuts, but the quality helps mitigate that risk. Dividend growth stocks often pay low yields, but the focus on above-average yields within this universe helps solve that.

With a current yield of 3.1% and 14 consecutive years of annual dividend growth, it's perhaps the best ETF for delivering sustainable high yields.

Admittedly, there's some risk in putting your entire dividend income portfolio in a single fund. But the Schwab U.S. Dividend Equity ETF might be the exception to the rule.

Option 2: Three ETFs can improve the strategy

Investors looking for a broader dividend strategy can combine the Schwab U.S. Dividend Equity ETF with a pair of Vanguard ETFs.

The Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) focuses on large-cap companies with 10+ years of consecutive dividend growth. It only offers a modest 1.5% yield, but its emphasis on dividend growth (with an unusual tech tilt) can complement SCHD's multi-pronged approach.

The Vanguard High Dividend Yield ETF (NYSEMKT: VYM) starts with a broad universe of U.S. dividend-paying stocks and simply includes those with above-average forecasted yields. It's a pretty generic strategy, but it does a good job of offering a diversified, more conservative approach to potentially higher-risk, high-yield stocks. It currently pays 2.4%.

Consider this as a potential sample allocation:

ETF	Allocation	Primary objective
Schwab U.S. Dividend Equity ETF (SCHD)	40%	Dividend quality
Vanguard Dividend Appreciation ETF (VIG)	30%	Dividend growth
Vanguard High Dividend Yield ETF (VYM)	30%	Higher yield

Data sources: Fund websites.

The trade-off is that you'd be lowering your overall dividend yield. But you're diversifying your sources of income, and this should help mitigate some of the risk of any one strategy underperforming.

Option 3: Consider adding bonds for higher income

Yes, I understand this won't be the most popular suggestion right now. The Vanguard Total Bond Market ETF (NASDAQ: BND) still isn't back to its 2020 highs (although it's close), and long-term Treasuries have been a mess as an investment.

But it's impossible to ignore the 5.1% yield, especially considering that the next big move for bond yields could be lower instead of higher. The current high yield gives bonds a much bigger cushion against a further increase in rates. Plus, they work really well as an equity diversifier.

More conservative investors might want something like a 20% allocation in a dividend income portfolio. Or you may prefer no fixed income exposure. Whichever group you fall into, bonds should at least be a consideration for income.

Put your passive income strategy on autopilot

Whichever option you'd personally choose, I don't think there's any question that dividend ETFs can make life significantly easier than researching individual stocks.

You can easily automate contributions while you're building long-term wealth. Reinvest dividends to purchase additional shares, and avoid paying too much attention to short-term volatility.

When you build the right portfolio, you can let the funds do most of the work.

David Dierking has positions in Schwab U.S. Dividend Equity ETF and Vanguard Dividend Appreciation ETF. The Motley Fool has positions in and recommends Vanguard Dividend Appreciation ETF, Vanguard High Dividend Yield ETF, and Vanguard Total Bond Market ETF. The Motley Fool has a disclosure policy.