Investing in exchange-traded funds (ETFs) makes it easy to generate passive income. You simply buy a fund that pays dividends and sit back as the income flows into your brokerage account. In addition to income, many top ETFs also deliver strong total returns as earnings grow and stock prices rise.
Vanguard is home to several top ETFs. The Vanguard Utilities ETF(NYSEMKT: VPU) currently offers a 2.5% dividend yield. The fund has also historically delivered a 10% annualized total return. That makes it a great ETF to invest $10,000 into and hold for the long haul.
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The Vanguard Utilities ETF invests in utility stocks. It currently holds 67 utilities. These companies generate power and distribute electricity, water, and natural gas to homes and businesses. Most utilities operate as regulated monopolies. They have the exclusive rights to provide services in their service territory, with government agencies regulating the rates they charge customers. As a result, these entities generate stable earnings that steady grow as they expand their operations and regulators approve rate increases.
Most utilities return a meaningful percentage of their stable cash flow to investors via dividends. The fund’s current dividend yield is 2.5%, more than double the S&P 500‘s 1.2%. At this rate, a $10,000 investment in this ETF would generate $250 of dividend income each year. The fund’s dividend income should rise each year as the utilities it holds increase their dividend payments. Many utilities have long records of growing their dividends.
This dividend growth has enabled the fund to generate strong total returns (dividend income plus stock price appreciation). The Vanguard Utilities ETF has generated a 10% annualized total return since its inception in 2004. To put that into perspective, a $10,000 investment made in the fund at its inception has grown into over $83,000.
Utilities have generated strong total returns even though power demand has grown modestly over the past two decades (10% overall). Forecasters expect that U.S. power demand will surge over the next 20 years (58% increase), powered by AI data centers, electric vehicles, and other catalysts. That puts the Vanguard Utilities ETF in a strong position to continue generating total annual returns of at least 10%.
For example, the fund’s largest holding is leading U.S. electric utilityNextEra Energy(NYSE: NEE), with a 12% allocation. NextEra has grown briskly over the past two decades by investing in renewable energy (9% compound annual earnings growth rate, triple the utility sector average). The company expects to grow its earnings at a rate of more than 8% annually over the next decade. That’s a conservative estimate based on the capital it expects to invest in expanding its electric utility and clean power portfolio. NextEra could grow even faster if it secures additional data center hub projects, develops small modular nuclear reactors, and makes acquisitions. Add that high-powered earnings growth to its 2.7%-yielding dividend, and NextEra should generate robust total returns over the next 10 years.
Another top fund holding is Constellation Energy(NASDAQ: CEG). The company recently closed its acquisition of fellow power producer Capline, creating the country’s largest clean power producer. Constellation Energy is a leader in nuclear, natural gas, and geothermal energy. It plans to add significant new generation capacity by 2030 to support surging electricity demand. The acquisition of Calpine, along with its investment to add new generation capacity, should support 20% compound annual earnings-per-share growth through 2029, with upside potential from securing additional growth catalysts. That could give Constellation Energy the power to generate robust total returns in the coming years, benefiting the Vanguard Utilities ETF.
Investing $10,000 into the Vanguard Utilities ETF would be a smart strategy. It would enable you to generate meaningful dividend income while benefiting from the fund’s robust total-return potential. You don’t need to invest all that money at once, as it currently costs less than $200 to buy a share in this excellent Vanguard ETF. That allows you to steadily build your position in this high-powered fund.
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Matt DiLallo has positions in NextEra Energy. The Motley Fool has positions in and recommends Constellation Energy and NextEra Energy. The Motley Fool has a disclosure policy.
