Unlocking Passive Income: The Vanguard Utilities ETF

British rock group Dire Straits had a monster hit in the 1980s with their song "Money for Nothing." The instantly recognizable guitar riff and catchy lyrics resonated with many, particularly the sentiment of wanting to earn "money for nothing." This concept aligns perfectly with the idea of passive income—earning money without continuous effort beyond the initial setup. If you’re looking to enjoy decades of passive income, Vanguard offers a compelling option: the Vanguard Utilities ETF.

A Proven Winner

When discussing passive income and Vanguard, many might immediately think of the Vanguard High Dividend Yield ETF. With "high dividend yield" in its name, it certainly sounds appealing to income investors. However, there’s an even more attractive choice in the Vanguard family: the Vanguard Utilities ETF (VPU). This ETF boasts a 30-day SEC yield of 2.89%, surpassing any other stock ETF offered by Vanguard, including the High Dividend Yield ETF. The SEC yield is a standardized measure that reflects a fund’s hypothetical annualized income as a percentage of its assets, making it a reliable indicator for income-focused investors.

The Vanguard Utilities ETF primarily invests in utility stocks, currently holding 69 different companies. Its top holdings include industry giants such as NextEra Energy, Southern Company, Duke Energy, Constellation Energy, and American Electric Power, which together account for nearly 35% of the ETF’s assets. This diversified approach not only mitigates risk but also enhances the potential for stable returns.

Since its inception in January 2004, the Vanguard Utilities ETF has delivered an average annual total return of 9.58%. It has performed exceptionally well over the past year, soaring close to 19%, and has shown resilience during recent market downturns. Moreover, like all Vanguard ETFs, it comes with a low annual expense ratio of just 0.09%, significantly below the average expense ratio of 1.01% for similar funds.

Why This Vanguard ETF is a Passive Income Machine

The Vanguard Utilities ETF stands out as a passive income powerhouse for several reasons:

Stable Cash Flow: Many utility companies in the ETF’s portfolio operate as regulated monopolies. This structure provides predictable and stable cash flow, which translates into consistent dividends.

Dividend Reliability: While no investment is entirely risk-free, utility stocks are generally less volatile than other sectors. The management teams of these companies prioritize consistent dividend payments and growth. For instance, NextEra Energy and Southern Company have increased their dividends for 31 and 24 consecutive years, respectively.

Mature Markets: Utilities typically operate in mature markets, allowing them to return a significant portion of their profits to shareholders through dividends. This focus on shareholder returns is a core aspect of their corporate culture.

One Caveat

While the Vanguard Utilities ETF is an excellent choice for passive income seekers, growth-oriented investors might find it less appealing. In terms of average annual total return since inception, it ranks behind 29 other Vanguard ETFs. However, there are reasons to believe that the Vanguard Utilities ETF could experience stronger growth in the coming years.

The rising adoption of artificial intelligence (AI) is driving the construction of more data centers, which require substantial amounts of electricity. This trend presents significant growth opportunities for electric utility companies, natural gas utility companies, and renewable energy firms that make up a large portion of the Vanguard Utilities ETF’s portfolio.

Conclusion

In a world where many dream of earning "money for nothing," the Vanguard Utilities ETF offers a practical pathway to achieving passive income. With its stable cash flow, reliable dividends, and low expense ratio, it stands out as a solid investment choice for those looking to secure their financial future. While it may not be the fastest-growing option in Vanguard’s lineup, its potential for steady income and resilience in fluctuating markets makes it a worthy consideration for any investor’s portfolio.

For those ready to take the plunge into passive income, the Vanguard Utilities ETF could be the key to unlocking a more financially secure future.

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Constellation Energy, NextEra Energy, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool recommends Duke Energy. The Motley Fool has a disclosure policy.