It's been a rough start to 2025, with the S&P 500 having its worst quarter since 2022 followed by escalating trade tensions in April. Yet through it all, the utilities sector has been a passive-income powerhouse and a beacon of safety thanks to its low volatility.
Investors looking for broad-based exposure to the utilities sector might want to consider an exchange-traded fund (ETF) like the Vanguard Utilities ETF (VPU +0.33%).
By investing $5,000 with the Vanguard Utilities ETF, you can expect to generate $150 in annual dividend income based on the fund's 3% yield. Here's why the ETF is worth a closer look.
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Boring but reliable businesses
Utilities are the second-best-performing sector year to date and one of just two sectors that are up slightly compared to the S&P 500's more than 8% drop.
The utility sector mainly comprises regulated electric utilities. These companies work with regulators and government agencies to set prices, which allows utilities to budget for necessary maintenance on existing infrastructure and plan for new investments without squeezing their customers.
Many utilities effectively act as regional monopolies. So, buying a utilities ETF is a simple way to get exposure to the national electric grid rather than investing in one single region.
For example, the largest holding in the Vanguard Utilities ETF is NextEra Energy, which owns Florida Power & Light, the state's largest electric utility. It also has power generation assets across the country.
Southern Company serves customers in the southeastern U.S. But like NextEra, it also has nationwide power generation assets.
Electric and gas utilities operated by Duke Energy serve customers in North Carolina, South Carolina, Florida, Tennessee, Ohio, Kentucky, Florida, and Indiana. The company has a mix of fossil fuel and renewable energy power plants.
A safe sector with limited growth prospects
Utilities are a relatively safe sector during economic uncertainty, trade tensions, and even recessions because keeping the lights on and the water running are basic needs -- similar to why the consumer staples sector is holding up so well despite the broader market sell-off.
If the U.S. economy were to dip into a recession because of a trade war, then utilities would be one of the best-positioned sectors. They aren't exporting power overseas, they are producing it domestically and then transmitting and distributing it to consumers in the U.S. There isn't the global trade component as there is for, say, the oil and gas industry.
The downside of investing in the utility sector is its low growth. Regulated utilities are limited in how much they can raise prices, so they mainly depend on higher resource demand and a growing population.
Higher interest rates have increased borrowing costs, which is challenging for these capital-intensive businesses. Many have considerable debt on their balance sheets, and higher interest rates make it harder to manage that debt.
Still, the sector as a whole is an excellent way to generate passive income. Many of the companies in the Vanguard Utilities ETF pass along the majority of profits to shareholders through dividends.
NextEra has a multi-decade track record of raising its dividend. In February, it announced a 10% hike and plans to increase its dividend by around 10% per year through at least 2026. The stock currently yields 3.4%.
Southern Company has raised its dividend for 23 consecutive years and currently yields 3.2%.
Since so many utilities have high yields, the Vanguard Utilities ETF averages out to an excellent 3%. It also has a price-to-earnings ratio under 20, making it a good fit for risk-averse value investors looking for passive income. And with a mere 0.09% expense ratio and a minimum investment of just $1, the ETF is a simple way to get exposure to the utility sector without racking up high fees or having to commit a lot of capital.
A safe choice amid tariff uncertainty
The Vanguard Utilities ETF is a great fit for folks who are more focused on capital preservation and passive income than capital appreciation. Utilities are well positioned to grow their dividends even during economic downturns, but they also tend to lag the broader market during periods of expansion.
Over the last 10 years, for example, the Vanguard Utilities ETF has produced a total return (capital gains plus dividends) of 133.9% compared to a 203.8% gain for the Vanguard S&P 500 ETF (VOO +1.21%).
In the long term, the utilities sector will likely underperform the S&P 500, but that might be OK for investors looking to reduce volatility and boost their passive income.
