Alveolar epithelial type II cells (AEC2s) are the facultative progenitors of lung alveoli and serve as the surfactant-producing cells of air-breathing organisms. Although primary human AEC2s are difficult to maintain stably in cell cultures, recent advances have facilitated the derivation of AEC2-like cells from human pluripotent stem cells (hPSCs) in vitro. Here, we provide a detailed protocol for the directed differentiation of hPSCs into self-renewing AEC2-like cells that can be maintained for up to 1 year in culture as epithelial-only spheres without the need for supporting mesenchymal feeder cells. The month-long protocol requires recapitulation of the sequence of milestones associated with in vivo development of the distal lung, beginning with differentiation of cells into anterior foregut endoderm, which is followed by their lineage specification into NKX2-1⁺ lung progenitors and then distal/alveolar differentiation to produce progeny that express transcripts and possess functional properties associated with AEC2s.