Truly passive income is easy to find on the stock market.
It's easy to find passive income on the market by simply purchasing dividend stocks. Load up on some high-yield dividend payers, and you can achieve a quick 3% return (or more) right from the start. This yield will likely grow from there as the stocks boost their dividends over the years. Procter & Gamble has hiked its payout for more than 60 consecutive years, for example.
It's not easy to build a portfolio of these dividend stocks, though. Reaching for high yields can be a risky strategy, for one, since these elevated rates tend to be attached to businesses that are going through operating challenges or are hampered by sluggish growth prospects. It's always possible to pick a company that ends up being squashed by competition, too.
That's where an exchange-traded fund (ETF) makes sense as an investment option. Buying a single ETF can deliver the diversification you need in addition to exposure to whatever market sector you are targeting.
I'm taking a closer look at the Vanguard High Dividend Yield ETF (VYM 0.96%), which focuses on large companies that pay above-average dividends. The fund's roughly 3% yield means that you can get significant passive income from the holding. Putting $80,000 into it would deliver about $200 per month in dividend payments.
Where the money goes
It's important to know where your investment dollars are going when you buy an ETF. The good news is that the cash isn't going toward fees in this case, which is great news for your long-term returns. Vanguard is known for offering some of the lowest expense rates in the business, and this fund is no exception.
As for the stocks you'll gain exposure to, VYM lists several members of the Dow Jones Industrial Average among its biggest holdings. Johnson & Johnson, Procter & Gamble, Home Depot, and Walmart are a few of its top 10 investments by value.
You might notice that what's missing from this list is any large tech or growth stock. None of the "Magnificent Seven" are owned by this ETF, and that's a direct consequence of its focus on yield over growth. The tech sector only accounts for 9% of its holdings, in fact, with consumer staples, energy, and financials all taking up more room in the portfolio.
That's a good thing for investors who already have exposure to the tech world, perhaps through direct ownership of companies like Apple, or through a fund that replicates the wider S&P 500. Owning the Vanguard High Dividend Yield ETF can serve as a great counterbalance against these more premium stocks.
What to expect
The ETF is likely to perform well during stock market slumps and when fears of a recession are spiking. In contrast, you'll see some weak short-term results during market rallies. That's exactly what happened in 2023, when the fund gained just 6% compared to the over 25% spike in the S&P 500.
Dividend investors don't need to worry so much about short-term swings like that. Instead, focus on keeping your costs low and gaining exposure to a wide range of stocks that pay generous yields. That's exactly what you get with an investment in the Vanguard High Dividend Yield ETF.
Demitri Kalogeropoulos has positions in Apple and Home Depot. The Motley Fool has positions in and recommends Apple, Home Depot, Vanguard Whitehall Funds - Vanguard High Dividend Yield ETF, and Walmart. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.
