British rock group Dire Straits had a monster hit back in the 1980s with their song Money for Nothing. While the instantly recognizable guitar riff was arguably the song's main appeal, its sentiment is attractive, too. Most people would love to have money for nothing. That's what passive income is all about. You reap rewards without having to work for them beyond the initial steps.

If you want to enjoy decades of passive income, I think Vanguard offers a good way to achieve your goal. Here's one of its exchange-traded funds (ETFs) to buy and hold forever.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue »

A proven winner

Since we're talking about passive income and Vanguard, you might think the ETF I have in mind is the Vanguard High Dividend Yield ETF. After all, this fund has "high dividend yield" in its name. That will sound great to income investors.

As good of a pick as the Vanguard High Dividend Yield ETF is, though, I'd argue there's an even better choice in the Vanguard family right now: the Vanguard Utilities ETF (NYSEMKT: VPU). This ETF offers a 30-day SEC yield of 2.89%, higher than any other stock ETF Vanguard offers (including the Vanguard High Dividend Yield ETF). A fund's SEC yield is calculated via a formula developed by the Securities and Exchange Commission that looks at a fund's hypothetical annualized income as a percentage of its assets.

Unsurprisingly, the Vanguard Utilities ETF invests in utility stocks. It currently owns 69 stocks, with top holdings including NextEra Energy, Southern Company, Duke Energy, Constellation Energy, and American Electric Power. These five stocks comprise nearly 35% of the ETF's assets.

This Vanguard ETF has delivered an average annual total return of 9.58% since its inception in January 2004. It's been an especially strong performer over the last 12 months, soaring close to 19%. The fund has even held up well during the recent stock market plunge.

Like all Vanguard ETFs, the Vanguard Utilities ETF is inexpensive to own. Its annual expense ratio is only 0.09%, well below the average expense ratio of 1.01% for similar funds.

Why this Vanguard ETF is a passive income machine

I don't think there's any question that the Vanguard Utilities ETF is a passive income machine. But why? Several reasons stand out.

First, many of the utility companies in the fund's portfolio are regulated monopolies. This means they have predictable and stable cash flow. And that translates to steady dividends.

Are utilities risk-free? Unfortunately not. Utility companies sometimes borrow too much and have to cut their dividends. Their share prices aren't immune to volatility, either. However, utility stocks are typically less risky than most stocks.

Importantly, dividends often make up a core part of the investment thesis for utility stocks. The management teams of utility companies recognize this. As a result, they emphasize consistent dividend payments and dividend growth as a key part of the corporate culture. For example, NextEra Energy and Southern Company (the Vanguard Utilities ETF's top two holdings) have increased their dividends for 31 and 24 consecutive years, respectively.

Also, utilities usually compete in relatively mature markets. This gives them flexibility to return more of their profits to shareholders via dividends.

One caveat

The Vanguard Utilities ETF is a great pick for investors seeking passive income. However, growth-oriented investors might prefer other ETFs offered by Vanguard. The Vanguard Utilities ETF ranks behind 29 other Vanguard ETFs based on average annual total return since inception.

That said, I think the Vanguard Utilities ETF could be poised for stronger growth in the coming years than it has delivered in the past. The rising adoption of artificial intelligence (AI) is fueling the construction of more data centers. These data centers require massive amounts of electric power. This presents great growth prospects for electric utility companies, natural gas utility companies, and renewable power companies that make up the lion's share of this Vanguard ETF's portfolio.

Should you invest $1,000 in Vanguard Utilities ETF right now?

Before you buy stock in Vanguard Utilities ETF, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Vanguard Utilities ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $591,533!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $652,319!*

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See the 10 stocks »

*Stock Advisor returns as of April 21, 2025

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Constellation Energy, NextEra Energy, and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool recommends Duke Energy. The Motley Fool has a disclosure policy.

The stock market has been rocked by volatility this year. The S&P 500 was recently down by about 10% since the calendar flipped the page to 2025. That volatility likely has your portfolio down deep in the red.

While you can't eliminate market volatility from your portfolio, you can reduce its sting. One way to do that is by investing in dividend stocks. They provide you with a tangible return in the form of income. On top of that, companies that grow their dividends have historically been less volatile than the S&P 500 as a whole.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

Vanguard makes it easy to add dividend stocks to your portfolio through its many exchange-traded funds (ETFs). Three top Vanguard dividend ETFs to buy to help mute volatility are Vanguard Utilities ETF (NYSEMKT: VPU), Vanguard High Dividend Yield ETF (NYSEMKT: VYM), and Vanguard Real Estate ETF (NYSEMKT: VNQ). As the chart below showcases, they haven't slumped nearly as much as the S&P 500 this year:

^SPX data by YCharts

Real estate helps diversify a portfolio and reduce volatility

The Vanguard Real Estate ETF focuses on owning real estate investment trusts (REITs). These companies own income-generating real estate. They use that rental income to pay dividends and invest in additional income-generating real estate.

Investing in real estate is a great way to diversify your portfolio and insulate it from some of the risks of investing in stocks and bonds. REITs have historically been much less volatile than the broader stock market. For example, of the 16 REITs that have been members of the S&P 500 over the past three decades, all but two have betas less than the S&P 500, meaning they've historically been less volatile than that index.

A big driver of the lower volatility of REITs is their dividends, which tend to grow over the long term. The Vanguard Real Estate ETF currently has a dividend yield of around 3.5%, which is a lot higher than the S&P 500's 1.4% yield. That higher income yield provides investors with a higher base return, which also helps cushion some of the impact of volatility.

High-quality, high-yielding dividend stocks help a port

The Vanguard High Dividend Yield ETF focuses on companies that pay high-yielding dividends. The fund currently has a dividend yield of around 2.7%, nearly double the S&P 500's dividend yield. Because of that, it provides investors with a higher base return.

While the fund focuses broadly on stocks with higher dividend yields, most of its top holdings also have excellent records of growing their dividends, which helps mute volatility. For example, its top holding is semiconductor and software giant Broadcom. The technology company currently offers a dividend yield right around the S&P 500's level. However, Broadcom has a terrific record of delivering above-average dividend growth. Late last year, Broadcom hiked its payment by 11%. That extended its dividend growth streak to 14 straight years. The company has boosted its payout by a jaw-dropping 8,333% during that period.

Another top holding is oil giant ExxonMobil. The big oil company currently offers a much higher dividend yield of around 4%. Exxon has a fantastic record of growing its dividend. The oil giant raised its payment by another 4% earlier this year, its 42nd straight year of increasing its dividend.

Energize your portfolio with these defensive stocks

The Vanguard Utilities ETF owns companies that distribute electricity, water, or gas to customers or produce power that they sell to other utilities and large corporate customers. Most utilities generate very stable cash flow because government regulators set their rates while demand for their services tends to be very steady, even during a recession. In addition, many utilities and utility-like companies produce additional revenue backed by long-term, fixed-rate contracts, providing them with additional sources of stable cash flow.

The low-risk business models of most utilities enable them to generate stable cash flow to pay dividends and invest in expanding their operations. As a result, utilities tend to have a higher yielding dividend (The Vanguard Utilities ETF yields 2.9%) that slowly rises.

For example, Duke Energy, one of its top holdings, has paid dividends for 99 straight years. While Duke Energy hasn't increased its payment every single year, it has raised its payment for the past 18 years in a row. That growth should continue as Duke invests heavily in supporting the growing demand for electricity in the regions it serves.

Dividend stocks can help lessen the impact of stock market volatility

Adding one or more Vanguard ETFs focusing on dividend stocks to your portfolio is a great way to reduce volatility. Dividend stocks have tended to be less volatile because their growing income payments help cushion the blow. That can help you sleep a little better at night knowing your portfolio has some added downside protection.

Should you invest $1,000 in Vanguard World Fund - Vanguard Utilities ETF right now?

Before you buy stock in Vanguard World Fund - Vanguard Utilities ETF, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Vanguard World Fund - Vanguard Utilities ETF wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you’d have $495,226!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $679,900!*

Now, it’s worth noting Stock Advisor’s total average return is 796% — a market-crushing outperformance compared to 155% for the S&P 500. Don’t miss out on the latest top 10 list, available when you join Stock Advisor.

See the 10 stocks »

*Stock Advisor returns as of April 10, 2025

Matt DiLallo has positions in Broadcom. The Motley Fool has positions in and recommends Vanguard Real Estate ETF and Vanguard Whitehall Funds-Vanguard High Dividend Yield ETF. The Motley Fool recommends Broadcom and Duke Energy. The Motley Fool has a disclosure policy.