In contrast to other financial investments like real estate, it's relatively easy to generate passive income in the stock market. Putting money into dividend stocks will deliver instant cash flow in the form of regular quarterly payments. There's essentially no effort on your part, either, after making your initial purchase.
There are dozens of well-known stocks that have long histories of making annual increases to their payouts. As a result, if an initial dividend payment seems small, investors may see that income stream grow over the years.
Yet some investors are deterred by the prospect of purchasing individual stocks that are subject to huge price swings at any time. That's where owning a basket of these stocks through an exchange-traded fund (ETF) comes into play.
Buy this Vanguard dividend ETF
The Vanguard High Dividend Yield ETF (VYM 0.26%) is an excellent choice for investors looking for serious passive income and diversification. The fund is passively managed, meaning it doesn't employ expensive fund managers that eat away at your capital through high expenses.
On the contrary, this ETF charges its shareholders almost nothing each year. Its expense ratio is 0.06%, compared to 0.90% for many of its rivals.
Buying the Vanguard High Dividend Yield fund will give you exposure to a wide selection of the largest dividend-paying stocks on the market. Top holdings include members of the Dow Jones Industrial Average, such as Procter & Gamble and Home Depot.
The fund offers a great way to balance your portfolio against too much exposure to the tech industry, which has rallied in the past year, as well. That segment accounts for less than 10% of the fund's assets.
Passive income stream
The fund yields 2.8% today, or approximately double what you could earn from holding the wider S&P 500. That means an overall investment of $43,000 would secure you $1,200 per year, or $100 per month in dividend income.
Of course, you could work up to that $43,000 over time. You could choose to have dividends reinvested automatically when you're building up your holding, too. That way, you can accumulate more shares with each quarter, amplifying long-term returns.
There are risks to owning this ETF. Its focus on dividend payers has limited its growth in the past year, for example, as these investments have fallen out of favor on Wall Street. The fund has gained just 9% in the past year, compared to a 21% surge in the S&P 500.
On the flip side, you'll likely do better with this fund in your portfolio during the next market downturn. Large dividend stocks tend to outperform growth stocks when worries spike over a recession. The income you'll receive during cyclical slumps works to your advantage in two ways -- as a cushion for your returns and as a way to pick up more shares through automatic reinvestments when the stock price is down.
In any case, consider making dividend ETFs a significant part of your income investing strategy. The Vanguard High Dividend Yield ETF delivers benefits like instant income, diversification, and low costs. These are valuable factors that should support excellent returns for patient investors.
