Investing in dividend stocks is one of the easier ways to generate passive income. The only work you need to do is build a diversified portfolio of high-quality, high-yielding dividend-paying stocks. You can then sit back and watch the dividend income flow into your account.

An even easier pathway to passive income is to invest in an exchange-traded fund (ETF) focused on higher-yielding dividend-paying stocks. Schwab U.S. Dividend Equity ETF (SCHD 0.63%) and Vanguard Real Estate ETF (VNQ 0.80%) are great options. These ETFs each hold over 100 higher-yielding dividend-paying stocks, providing instant diversification. Here's a closer look at these two higher-yielding dividend ETFs.

An instant income portfolio

Schwab U.S. Dividend Equity ETF is a passively managed fund that tracks the total return of the Dow Jones U.S. Dividend 100 Index. That index features 100 of the country's top dividend stocks and focuses on higher-yielding companies with strong records of consistently paying dividends. It selects companies based on their financial strength compared to their peers.

The ETF holds about 100 stocks diversified across several stock market sectors:

  • Financials: 17.4% of the portfolio
  • Healthcare: 15.7%
  • Consumer staples: 13.9%
  • Industrials: 13.5%
  • Energy: 12.8%
  • Consumer discretionary: 10.1%
  • Information technology: 8.7%
  • Communication services: 4.7%
  • Materials: 3.1%

The fund's top 10 holdings comprise about 40% of its assets. It holds several high-yielding dividend stocks, including Verizon (4% of the portfolio) and Pfizer (3.9%), which yield nearly 7% and 6%, respectively. Most of its top holdings have excellent records of increasing their dividends (Verizon has grown its payout for 17 straight years, while Pfizer's streak is up to 15 straight years).

The ETF's current distribution yield is over 3.3%. That's more than double the S&P 500's dividend yield (about 1.3%). The fund charges a very low ETF expense ratio of 0.06%. That low fee enables fund investors to keep more of the dividend income generated by its holdings. For example, a $1,000 investment in the fund would produce over $33 of dividend income each year while only incurring $0.60 in management fees.

The really lazy way to be a landlord

Investing in real estate can be a great way to generate passive income. However, managing rental properties takes work (and a lot of money). A lower-cost and more passive approach is to invest in real estate investment trusts (REITs). REITs own income-producing properties and typically pay out most of their income in dividends.

An even more passive strategy is to invest in an ETF focused on REITs, like the Vanguard Real Estate ETF, which invests exclusively in REITs. It currently holds over 150 of them, giving investors diversified exposure to the entire sector. REITs tend to pay high-yielding, growing dividends. Here's a snapshot of some of its largest holdings:

  • Prologis (6.5% of the fund's assets): The leading industrial REIT yields nearly 4%. Over the past five years, it has grown its dividend at a 13% compound annual rate, more than double the REIT sector's average of 5%.
  • American Tower (5.5%): This data infrastructure REIT yields around 3.5%. It has grown its payout by nearly 19% annually over the past decade.
  • Realty Income (3.1%): The diversified REIT's dividend yield is over 6%. It has grown its dividend for over 25 straight years.

The Vanguard Real Estate ETF's yield is right around 4%. The fund provides broad access to high-yielding REITs for a reasonable fee (0.13% expense ratio). Since most REITs tend to grow their dividends over time, this ETF should supply investors with a steadily rising passive income stream.

Easy ways to start generating passive income

Investing in high-yielding dividend stocks and REITs is a great way to collect dividend income. ETFs like Schwab U.S. Dividend Equity ETF and Vanguard Real Estate ETF make it even easier by giving investors instant access to these income producers. Because of that, they're great ETFs to buy for those desiring to sit back and watch the income steadily flow into their accounts.