Looking for Long-Term Passive Income? Invest in This ETF and Hold It Forever.

Unlocking Passive Income: The Power of ETFs

A steady stream of passive income is the ultimate goal for many investors. After all, who doesn’t like the idea of having ever-more cash rolling in with little to no effort on their part? Fortunately, anyone can boost their passive income with some savvy investing, and best of all, it no longer requires the risk and effort that comes with picking individual stocks.

The Simplicity of ETFs

Today, the simplest way for most people to generate passive income is to invest in an exchange-traded fund (ETF). These funds represent a basket of stocks, curated based on a specific strategy, whether that be tracking a popular index or targeting a specific sector. ETFs are traded like stocks, and most importantly, they don’t require specialized knowledge—the fund’s managers ensure its holdings stay aligned with its stated objective in exchange for a small fee.

This is a stark contrast to traditional sources of passive income, such as real estate investments, where a landlord is often responsible for repairs, homeowner dues, utility costs, and more. With ETFs, investors can enjoy the benefits of diversification without the headaches of property management.

Why Choose the Vanguard High Dividend Yield ETF?

Among the thousands of ETFs available, the Vanguard High Dividend Yield ETF (NYSEMKT: VYM) stands out as a top choice for passive income. Here’s why:

1. Impressive Total Returns

First off, this Vanguard fund has delivered the best total return over the last five years compared to other popular dividend ETFs. This performance is crucial for investors looking to maximize their income while preserving capital.

2. Low Expense Ratio

The Vanguard High Dividend Yield ETF is passively managed and tracks the FTSE High Dividend Yield Index, allowing it to charge an extremely low expense ratio of just 0.06%. This means an investment of $10,000 will only incur $6 in annual fees. Over time, this presents enormous savings compared to actively-managed funds, which may charge as much as 0.50% or more.

3. Capital Preservation

An important part of income generation is the preservation of capital. The sweet spot for income investors is an instrument that not only delivers significant cash flow but also steadily grows in value to maintain purchasing power. This is why the Vanguard fund is so appealing for income investors.

Balancing Yield and Growth

While the Vanguard High Dividend Yield ETF does not offer the highest dividend yield (currently around 2.5%), it compensates for this with significant holdings of quality dividend stocks like Broadcom, JPMorgan Chase, and Walmart. These stocks have helped the fund outperform many other dividend ETFs with higher yields but lower capital appreciation.

Over time, relying solely on high yields can be problematic, as stagnant or declining capital makes it difficult to keep up with the increasing cost of living due to inflation. Thus, a balanced approach focusing on total return is essential.

The Accessibility of Passive Income

Passive income is now accessible to anyone willing to buy and hold an investment like the Vanguard High Dividend Yield ETF. However, investors should avoid tunnel vision in chasing the highest yields and instead evaluate ETFs based on total return. This metric reveals how well a fund has performed overall, and it’s this mix of income and capital appreciation that makes the Vanguard ETF worth considering.

Final Thoughts

Before you buy stock in the Vanguard High Dividend Yield ETF, consider that there are many investment opportunities available. The Motley Fool Stock Advisor analyst team has identified what they believe are the 10 best stocks for investors to buy now, and the Vanguard ETF wasn’t one of them.

Investing in stocks like Netflix or Nvidia could yield significant returns, as evidenced by their historical performance. The Stock Advisor’s total average return is an impressive 1,058%, far surpassing the 188% return of the S&P 500.

In conclusion, while the Vanguard High Dividend Yield ETF is an excellent choice for passive income, it’s essential to remain open to other investment opportunities that may offer even greater potential for growth. By diversifying your portfolio and focusing on total returns, you can build a robust strategy for generating passive income that stands the test of time.

Investing wisely today can pave the way for a financially secure tomorrow. Whether you choose to invest in ETFs or explore other avenues, the key is to stay informed and make decisions that align with your financial goals.