Passive income isn't just about rental properties or side hustles. For many investors, exchange-traded funds (ETFs) are one of the most reliable ways to generate consistent cash flow without the headaches of managing tenants or chasing short-term trades. Dividend-focused ETFs pool together dozens or even hundreds of companies that share profits with shareholders, creating a built-in stream of payouts. Better yet, most of these funds charge ultra-low fees, giving you more of the return in your pocket.
Among the many choices, the Vanguard High Dividend Yield ETF (VYM 0.31%) stands out as one of the best options right now. While its 2.5% yield won't make income investors rich overnight, the fund offers something more valuable: 579 profitable companies trading at a massive discount to the broader market. For investors who want dependable income with upside potential, the Vanguard High Dividend Yield ETF delivers what flashier funds can't -- consistency without the premium price tag.
Image source: Getty Images.
The valuation gap nobody's discussing
Here's what should grab your attention: The fund's holdings trade at an average price-to-earnings (P/E) ratio of just 20 compared to 27 for the benchmark S&P 500. That's a 26% discount for owning some of America's most profitable businesses. We're not talking about dying industries or value traps. These are companies like JPMorgan Chase, Johnson & Johnson, and ExxonMobil that generate billions in free cash flow.
This valuation gap exists because Wall Street remains obsessed with artificial intelligence (AI) plays and growth stocks. While everyone chases Nvidia at 51 times earnings, the ETF quietly accumulates the boring businesses that actually fund America's retirement accounts.
The fund's broad range of holdings provides diversification that individual dividend stocks can't match. When General Electric cut its dividend in 2018, investors in the Vanguard High Dividend Yield ETF barely noticed -- it represented less than 1% of the portfolio. Try achieving that protection by picking stocks yourself.
The total return surprise
Forget the modest 2.5% yield for a moment. The Vanguard High Dividend Yield ETF has delivered 11.5% annual returns over the past 10 years, keeping pace with growth-focused funds while providing quarterly cash distributions. That top-tier performance comes from two sources most investors miss: dividend growth and multiple expansion.
Companies that consistently raise dividends tend to see their valuations expand over time. A stock yielding 3% that grows its payout 8% annually becomes increasingly attractive, pushing the share price higher. The fund captures this dynamic across hundreds of names, creating a compound effect that pure high-yield funds miss by chasing unsustainable 6% to 8% payouts.
At a 0.06% expense ratio -- just $6 annually per $10,000 invested -- Vanguard takes virtually nothing off the table. Compare that to actively managed dividend funds charging 0.60% or more while underperforming the broader market in most cases.
Who wins with this fund
This ETF suits three specific investor types. First, retirees who need income but can't stomach another 20% tech correction should appreciate the fund's defensive tilt. Second, younger investors building wealth benefit from reinvesting dividends at lower valuations than the broader market offers. Third, anyone worried about stretched S&P 500 multiples gets immediate diversification into value territory without sacrificing quality.
Who should look elsewhere? Growth investors won't find any 10-baggers here. Income maximizers needing 4% or higher yields should consider real estate investment trusts (REITs) or preferred stocks instead. And traders seeking quick gains will find the Vanguard High Dividend Yield ETF maddeningly steady -- it's designed to be boring.
A top passive income vehicle
For investors seeking reliable passive income without overpaying, the Vanguard High Dividend Yield ETF offers the complete package: sustainable yield, valuation upside, and rock-bottom fees.
