Whether you are an experienced investor or just getting started, exchange-traded funds (ETFs) can be a great addition to your portfolio for their diversification and simplicity. Vanguard is one of the largest investment firms in the world, and offers plenty of low-cost ETFs like the Vanguard High Dividend Yield ETF(NYSEMKT: VYM).
Another good option is dividend-paying companies with track records of growing their earnings and boosting payouts over time. Utility American Electric Power(NASDAQ: AEP) is a stable stalwart, while oilfield services company Baker Hughes(NASDAQ: BKR) has more risk, but also higher growth potential.
Here's what makes these income-producing investments worth a closer look.
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Your low-cost ticket to investment income
Daniel Foelber (Vanguard High Dividend Yield ETF): With $67.9 billion in net assets, the Vanguard High Dividend Yield ETF is a sizable yet low-cost way to achieve diversification across quality dividend stocks. The fund has a 0.06% expense ratio, which is slightly higher than those of funds like the Vanguard Growth ETF or Vanguard Value ETF, which both have 0.04% expense ratios. Even if you're investing hundreds of thousands of dollars in these funds, however, the difference is negligible. For example, a $100,000 investment at a 0.06% expense ratio is only charged $60, compared to $40 at 0.04%. Vanguard makes money because it manages trillions of dollars, so it can afford to charge dirt-cheap fees.
The High Dividend Yield ETF has 451 holdings with an average price-to-earnings ratio of just 16.3 and a dividend yield of 2.8%. For comparison, the Vanguard S&P 500 ETF has a 26 P/E ratio and a yield of just 1.3%.
The High Dividend Yield ETF achieves a lower multiple and higher yield by avoiding expensive growth stocks and targeting the less expensive sectors in the stock market. It is overweight sectors like consumer staples, energy, financials, utilities, and industrials.
Top holdings aren't Magnificent Seven stocks like Microsoft or Nvidia, but Dividend Kings like Procter & Gamble and Walmart. When the fund does invest in technology, it does so through a dividend-paying chip stock like Broadcom. Its top healthcare stocks are stodgy dividend-paying companies like Johnson & Johnson. The fund has holdings in drugmakers with high yields like Merck and AbbVie, not a highflyer like Eli Lilly.
With a focus on blue-chip stocks, value, and income, the fund is a good choice for investors looking for reliable passive income and capital preservation rather than innovative growth stocks that are driving today's bull market.
American Electric Power can charge up your passive income stream
Scott Levine (American Electric Power): There's no denying that a high-yield Vanguard fund is alluring, but choosing an individual stock with a hefty payout can also be appealing -- especially when it's sitting in the bargain bin. To this end, American Electric Power is certainly a stock that income investors should have on their radars. Between the electricity utility stock's inexpensive valuation and its forward-yielding dividend of 4.2%, today seems like a great time for income investors to click the buy button on American Electric Power stock.
Investors often flinch at the thought of buying high-yield dividend stocks because they're unsure of whether the company can sustain the dividend or if the high payout is imperiling the company's finances. These concerns are easily addressed in a regulated utility stock like American Electric Power. Because American Electric Power operates in regulated markets, it ensures certain rates of return. This provides management with a good perspective into future cash flows, helping it to plan for capital expenditures accordingly.
From 2024 through 2028, American Electric Power projects generating $38 billion in operating cash flow and returning $11.2 billion in dividends to investors. In terms of earnings, American Electric Power is targeting a conservative payout ratio of 60% to 70% -- something that seems attainable considering its five-year average payout ratio is 68.9%.
Currently, shares of American Electric Power are trading at 7.6 times operating cash flow, representing a discount to their five-year-average cash flow multiple of 9.6. But that's not the only way the stock seems attractively priced. With regards to earnings, American Electric Power's stock has a 19.8 price-to-earnings ratio, lower than its five-year-average P/E of 20.1 and the S&P 500's earnings multiple of 28.25.
Investors looking for exposure to rising energy prices should consider Baker Hughes
Lee Samaha(Baker Hughes): Unfortunately, the world is an unstable place, and a lot of oil is produced in areas of geopolitical instability. Moreover, there's always the chance that they become more unstable in the current environment. This is not the place for speculation on such matters, but it suffices to note that Reuters has been reporting significant buying of energy-related futures by hedge funds lately.
Throw in the OPEC and OPEC+ production cuts led by Saudi Arabia and Russia to support prices, and there's plenty of reason to believe that a relatively high price of oil is here to stay. It also supports the idea that there'll be a shift in who invests in energy where. That's all positive for the outlook for Baker Hughes, a stock held in the Vanguard High Dividend Yield ETF.
That said, the company is far from a play on traditional fossil fuels. Indeed, Baker Hughes is growing its liquefied natural gas equipment and services, and it's also rapidly expanding its "new energy" orders (expected to triple from 2021 to 2024, reaching $800 million to $1 billion), expecting them to hit $6 billion to $7 billion in 2030.
The midpoint of management's earnings before interest, taxation, depreciation, and amortization (EBITDA) calls for $4.3 billion in EBITDA in 2024, a figure that puts the stock on a forward enterprise value (market cap plus net debt) to EBITDA ratio of less than nine. That's attractive by itself, and even more so in the current environment where the risk is to the upside for energy prices.
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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Merck, Microsoft, Nvidia, Vanguard Index Funds-Vanguard Growth ETF, Vanguard Index Funds-Vanguard Value ETF, Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF, and Walmart. The Motley Fool recommends Broadcom and Johnson & Johnson and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
