ETFs
5 Low-Cost Vanguard ETFs for Lifelong Passive Income
These ETFs allow you to generate dividend income from hundreds of companies for extremely low fees.
Vanguard has over 85 exchange traded funds (ETFs), but not all focus on stocks. Many target bonds and risk-free assets like U.S. Treasuries.
It’s hard for a stock ETF to compete with a bond fund on yield alone. However, the best ETFs reward investors with passive income and potential capital gains.
Here is why the Vanguard Value ETF (VTV 0.07%), Vanguard High Dividend Yield ETF (VYM 0.14%), Vanguard Dividend Appreciation ETF (VIG 0.11%), Vanguard Consumer Staples ETF (VDC -0.21%), and Vanguard Utilities Exchange Traded Fund (Virtual Power Unit 0.63%) are five great choices for generating lifetime passive income while gaining diversified exposure to a variety of companies.
Image source: Getty Images.
1. Vanguard Value ETF
With an expense ratio of just 0.04%, 342 holdings, and a dividend yield of 2.3%, the Vanguard Value ETF is perhaps one of the simplest and least expensive ways to generate passive income.
The fund excludes major growth names like Microsoft, Apple, Nvidia, Amazon, Alphabet, Meta-platformsAnd You’re here — who are all assets of the Vanguard Growth ETFs.
Since the start of 2023, the Vanguard Value ETF has been pummeled by the S&P 500 and the Vanguard Growth ETF – which has seen a staggering 77% rise in just 18 months Mega-cap growth stocks propelled broader indexes to new highsBut long-term investors know that any trend can seduce markets in the medium term.
Total VTV efficiency level data by YCharts
Risk-averse investors looking to limit volatility will appreciate the consistency of the Vanguard Value ETF. The fund’s top holdings are Berkshire Hathaway, Broadcom, JPMorgan Chase, ExxonMobilAnd United Health. Besides Broadcom – which has has experienced a period of great magnitude, like most players in the semiconductor industry — these companies are unlikely to see their stock prices increase several times in the short term. However, many of the fund’s holdings pay stable and growing dividends or reward shareholders with share buybacks — which is Berkshire Hathaway’s preferred method of returning capital to shareholders.
Adding all this up, ETFs are a great way to invest in the market as a whole with a value lens. This strategy can be particularly effective for investors who don’t want to pay a high price for growth stocks.
2. Vanguard High Dividend Yield ETF
The Vanguard High Dividend Yield ETF includes many of the same stocks as the Value ETF. The main difference is that each stock must pay a dividend, with an emphasis on regular dividend increases. So companies that are great value stocks but don’t pay dividends (like Berkshire Hathaway) are excluded from the fund.
With 556 stocks, the High Dividend Yield ETF holds more stocks than the Value ETF. As expected, its yield is higher, at 2.8%. Still, a yield of less than 3% may be surprising for a fund labeled “high yield.”
It is important to understand, however, that large stock market gains typically result in lower dividend yields. If a company’s stock price increases faster than its dividend, the yield will decrease. For example, Walmart announced a 9% dividend increase in February, its biggest hike in more than a decade. But the stock is up 28.9% year to date, making it the best-performing component of the Dow Jones Industrial Average — even better than growth stocks like Amazon and Microsoft. As a result, Walmart’s dividend yield has declined — but investors would certainly trade a massive capital gain for a percentage point or two of yield.
Many stocks like Walmart in the High Dividend Yield ETF have seen valuation increases over the past few years, which has benefited investors through capital gains but reduced their dividend yields. As a result, the High Dividend Yield ETF is no longer as profitable as it once was, but it remains a great source of passive income for investors looking for diversification and industry-leading companies.
3. Vanguard Dividend Appreciation ETF
The Vanguard Dividend Appreciation ETF focuses on growth, income and value stocks. Its goal is to find companies with a proven track record of increasing their payouts, with less emphasis on valuation or yield.
The fund’s top holdings are Apple and Microsoft, which are notably absent from the Value and High Dividend Yield ETFs. Although both of these ETFs yield less than 0.7%, Apple has raised its dividend every year since 2012 while Microsoft increased its dividend to a level average rate of more than 10% per year for 10 yearsThat’s a much faster pace of growth than ultra-safe dividends. pillars like Coca-Cola Or Procter & Gamble.
The Dividend Appreciation ETF is a great choice for investors who care more about earnings growth and the direction of a dividend rather than its past performance or a stock’s current yield.
4. Vanguard Consumer Staples ETF
The Vanguard Consumer Staples ETF tracks the performance of the consumer staples sector. Top holdings include Procter & Gamble, Costco WholesalerWalmart, Coca-Cola and PepsiCoAt 0.10%, the fund has a slightly higher expense ratio than some other Vanguard funds, but that still works out to just $1 for every $1,000 invested.
One of the key benefits of investing in the consumer staples sector is its resilience during recessions and reliability. Consumer staples companies are less affected by economic cycles than consumer discretionary companies, which rely on consumers purchasing products that they don’t regularly need. In a recession, consumers are more likely to cut back on expensive vacations or big-ticket items than they are on toothpaste or paper towels.
Even if you’re new to investing, chances are you’re familiar with many companies in the consumer staples sector. You may not know that Coca-Cola owns Topo Chico, BodyArmor, and Simply juices and beverages. But chances are you’re generally familiar with the company’s business model.
The easy-to-understand nature of consumer staples, coupled with the consistency of earnings regardless of the market cycle, makes it the ideal sector for risk-averse investors looking to generate income from familiar businesses.
5. Vanguard Utilities ETF
Like consumer staples, utilities tend to be relatively recession-resistant compared to other industries. In terms of budgeting, reducing electricity or water consumption is probably less important than reducing discretionary purchases.
Utilities benefit from growing consumption and population. The higher the demand for basic goods like electricity, gas and water, the greater the need to expand infrastructure to boost supply.
In this perspective, public services can be a better option than a bond or risk-free rate. Many of the top holdings in the Vanguard Utilities ETF work with agencies and regulators to set prices and pass on profits to shareholders. A utility can be vulnerable to a given geographic market. But a utility portfolio is a great way to earn a stable yield while staying invested in the market.
The Vanguard Utilities ETF has a yield of 3%, which is higher than the High Dividend Yield ETF. While the fund is unlikely to outperform major indices in a bull market, it has a good chance of being less volatile in the event of a selloff or major correction.
A Hands-Off Approach to Generating Passive Income
There are many different ways to target passive income in the stock market. Some investors prefer companies with limited growth prospects that use dividends as the primary means of passing on profits to shareholders. Others may look for companies that have have increased their payments every year for several decades.
These five ETFs are attractive starting points for investors looking to generate passive income with an emphasis on diversification.
One of the best ways to invest in ETFs is to combine them with individual stocks. If you already have a lot of exposure to large caps, the Dividend Appreciation ETF could be a good way to tap into some growth stocks while focusing on companies that are increasing their dividends. A sector ETF in consumer staples or utilities could be a good choice if you don’t already own leading companies in those sectors.
Ultimately, the best decision will depend on the contents of your portfolio, your risk tolerance, and your investment goals. Regardless of which ETF you choose (if any), you can rest easy knowing that these Vanguard funds charge extremely low fees.
Randi Zuckerberg, former head of market development and spokesperson for Facebook and sister of Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Berkshire Hathaway, Costco Wholesale, JPMorgan Chase, Meta Platforms, Microsoft, Nvidia, Tesla, Vanguard Index Funds-Vanguard Growth ETF, Vanguard Index Funds-Vanguard Value ETF, Vanguard Specialized Funds-Vanguard Dividend Appreciation ETF, Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF, and Walmart. The Motley Fool recommends Broadcom and UnitedHealth Group and recommends the following options: long January 2026 $395 call on Microsoft and short January 2026 $405 call on Microsoft. The Motley Fool has a position in the stocks mentioned above and recommends the following options: long January 2026 $395 call on Microsoft and short January 2026 $405 call on Microsoft. disclosure policy.