ETFs
Want decades of passive income? Buy this ETF and hold it forever
ETFs like this can instantly diversify your portfolio and provide you with reliable dividends for decades to come.
Are you looking for passive income? Exchange-traded funds (ETFs) are a great choice. These vehicles can instantly diversify your money, minimizing volatility. And if you choose the right ETF, you could earn reliable cash income for the rest of your life. So which is the best? ETFs for permanent passive income? This is an ETF I’ve been watching for decades.
The best investments for permanent passive income
Nothing is ever truly permanent. But if a source of income can be reliable for the rest of your life, this is pretty close. If you want permanent passive income, look utility stocks. Utility stocks are one of the best investments on the market today for generating reliable profits.
Utilities provide the basic resources needed to operate a modern economy, such as water, electricity, and natural gas. These services tend to be recession-proof. In other words, during a recession, demand declines very little, if at all. Since 2010, for example, annual electricity demand in the United States has remained between 3,856 terawatt hours and 4,067 terawatt hours despite numerous economic ups and downs.
Just consider whether you reduce your water or heating usage during a down market. There may be a decline in commercial or industrial sectors, but overall, demand for utilities is remarkably stable, regardless of economic conditions.
If volumes are stable, what about prices? Again, this is good news if you are looking for businesses that can generate stable monetary income. Many utility companies are considered “rate regulated.” This means that regulators dictate their profits in advance. The aim is to ensure that customers are not exploited, as they often have limited choices when it comes to electricity or heating.
This regulation limits the upside, but it also provides a stable floor to expectations. Thus, utility companies can not only maintain stable volumes regardless of economic conditions, but they can also maintain stable prices.
The combination of these factors generates reliable profits for utility companies. And because these companies already have expensive distribution infrastructure, they can return a significant percentage of these profits to shareholders in the form of dividends.
The only thing left to do is find an ETF that will automatically have you invested in dozens of the best utility stocks on the market.
My Favorite ETF for Long-Term Passive Income
Do you want to invest in utility stocks to create a long-term passive income stream? Look no further than Vanguard Utilities ETF (Virtual virtual unit -0.31%). As the name suggests, this ETF invests primarily in utilities, around 65 in total. This includes everything from energy utilities like NextEra Energy And Southern Company. to water services such as American Water Works Company. And Essentiel Utilities Inc.
Since 2004, the Vanguard Utilities ETF has generated annual total returns of approximately 9%. More than a third of this performance is due to dividends, which currently yield 3.6%. That’s lower than some other high-yielding options, but that’s where this ETF shines. Passive income streams should be reliable year after year. But it doesn’t matter how much of the income stream comes from dividends or capital appreciation. In fact, tax laws can make capital gains a more attractive option for generating income.
The Vanguard Utilities ETF offers a healthy mix of both. About a third of its long-term performance relies on dividends, regularly providing hard cash to shareholders. But two-thirds of its performance is due to capital appreciation. You can simply sell shares to generate income from these paper profits, possibly paying less taxes due to the preferential tax treatment on long-term capital gains.
Through both dividends and capital appreciation, the Vanguard Utilities ETF can provide you with a stable foundation to generate passive income for decades to come. No matter what direction the economy takes, people will demand water, heat and electricity, no matter how long you invest.
Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool ranks and recommends NextEra Energy. The Mad Motley has a disclosure policy.