Money doesn't jump into your pocket. You usually have to work for it. Once you have some money, though, you can make it work for you. That's the key to generating passive income.
Some ways of making passive income only work well for a relatively short period. Others are more suitable for the long term. Do you want decades of passive income? Here's an exchange-traded fund (ETF) to buy and hold forever.
A passive income machine
Vanguard manages several ETFs that should appeal to income investors. I think the Vanguard Utilities ETF(NYSEMKT: VPU) especially stands out. As its name indicates, the fund focuses on utility stocks.
The best way to compare the income that funds generate is the 30-day SEC yield established by the U.S. Securities and Exchange Commission. This metric reflects the annualized yield of a fund based on the income produced over a trailing-30-day period. The Vanguard Utilities ETF's 30-day SEC yield is a solid 3.27%.
You can probably also count on moderate growth in addition to dividends from this Vanguard ETF. It's generated an average annual return of over 9% since its inception in January 2004. So far this year, the fund is up nearly 9.7%, with a total return including dividends of around 11.5%.
Like all Vanguard funds, the Vanguard Utilities ETF has low costs. Its annual expense ratio is only 0.1%, well below the 0.99% average annual expense ratio of similar funds.
Investors seeking passive income tend to hate volatility -- and rightly so. The Vanguard Utilities ETF shines on this front. Its beta compared to the Dow Jones U.S. Total Stock Market Index is 0.67, reflecting a low level of historical volatility.
The sum of its parts
The Vanguard Utilities ETF is a great source of passive income because it's the sum of its parts. The fund owns 66 stocks with an average annual earnings growth rate of 6.4% over the last five years.
Nearly 63% of the fund's portfolio is invested in electric utilities. Almost one-fourth of the ETF's assets are in utilities with businesses that span multiple areas. The remainder of the Vanguard fund is invested in gas and water utilities and renewable electricity companies.
NextEra Energy ranks as the top holding of the Vanguard Utilities ETF. The Florida-based utility makes up 13.65% of the fund and pays a forward dividend yield of 2.83%.
Two other utilities operating in the southern U.S. trail NextEra. Nearly 7% of the Vanguard Utilities ETF is invested in Georgia-based Southern Company. North Carolina's Duke Energy is the third-largest holding, making up 6.64% of the portfolio.
One downside
Investors should be aware of one downside with the Vanguard Utilities ETF. Although it has delivered moderate growth historically, that growth hasn't been enough to keep up with the broader market.
The Vanguard 500 Index Fund, which attempts to track the performance of the S&P 500, generated a total return of more than 240% over the last 10 years. That's more than double the total return of the Vanguard Utilities ETF during the same period.
Investing always involves trade-offs. The trade-off with the Vanguard Utilities ETF is that you'll likely sacrifice some total returns in exchange for reliable income and low volatility. But for anyone wanting passive income for decades to come, this trade-off could be a good one.
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Keith Speights has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends NextEra Energy and Vanguard S&P 500 ETF. The Motley Fool recommends Duke Energy. The Motley Fool has a disclosure policy.
